Growing your Startup without Capital: Advisory Agreement

Growing your Startup without Capital: Advisory Agreement

How can my startup business attract talent while bootstrapped?

If you are running a startup, chances are you have reached out to a contractor or an advisor for help. While outsourcing work to independent contractors to undertake specific business functions often remains a cheaper and faster option than hiring a full-time employee, there are certain individuals that bring indispensable amounts of knowledge, skills, or resources to your business. Based on their expertise, you want to ensure that these individuals continue to work with your startup. The problem is, your startup cannot afford the salary or benefits that an established tech company can offer its workers.

 

What should I look for in an Advisor?

 

If an independent contractor has relevant experience in developing a product or technology, leveraging their advice can materially improve the growth of your company. Some individuals may have associations to investors or possess the requisite knowledge and experience in boosting your startup’s profile. Other individuals may provide professional or specialized services that your startup consistently relies on. Despite all the potential benefits that an Advisor can offer, entrepreneurs and founders should engage with potential advisors carefully. Having a good reputation or expertise in an area does not mean that they will be a good fit within in the company. Moreover, founder and entrepreneurs should take steps to protect leakage of intellectual property and confidential information.

 

What can my bootstrapped startup offer an advisor?

 

Without funding to pay Advisors a competitive salary, many tech startups in Victoria and Vancouver choose to offer independent contractors future equity in the company. In this instance, equity refers to the extent of ownership in the company. In other words, startup business offer a stake in the business contingent on reaching certain milestones which help the business build and grow. Offering future equity in a business is a great option when the Company and the Advisor are agreeable that the value of the shares issued in the Company to the Advisor are likely to increase through their cooperative efforts. Before considering what number of shares to issue to an Advisor, you’ll want to consider drafting an Advisory Agreement.

 

What is an Advisory Agreement?

 

An Advisory Agreement provides flexibility to startup companies so that they can give the people who help them grow a percentage of the company to reward them in the long-term. An Advisory Agreement is an agreement between the startup company and the potential advisor. An Advisory Agreement will help you determine the advisor’s role, time commitment, term, compensation, level of confidentiality, protection of intellectual property, assignment of development intellectual property, and how the shares will vest over time.

One option is the FAST agreement by the Founder’s institute. This agreement was made for the US market and should be used with caution by Canadian startups. Since it’s last update in 2017, several laws around employment and securities regulations have changed in Canada. Additionally, the FAST agreement does not contain bolstered protection for intellectual property. Instead of using a one-size-fits-none template that you found online, we offer flat rates to review and edit existing Advisory Agreements.

 

What is a Vesting schedule?

 

A Vesting Schedule outlines the process of earning an asset, like ownership in a company. Companies often use Vesting Schedules to encourage its personnel to stay with the company for longer or to perform better.

There are generally three types of vesting schedules: (i) Time-Based Vesting; (ii) Milestone-based Vesting; (iii) a Blended Option. With time-based stock vesting, you earn options or shares over time. Often there is a cliff period involved which requires that the Advisor work for a certain period of time before the options or a tranche of shares vests. Another option is milestone-based vesting where the advisor gets the option or shares after completing a specific project or after assisting the startup reach a certain business goal. Depending on the scenario, a startup may even implement a blended option which utilizes both time and milestones for shares in a company to vest.

A vesting schedule that works for one Advisor is not necessary the best suited for another. Our business lawyers have worked with hundreds of startups and can help you determine the best vesting schedule for your short term and long term business goals.

 

Startup Business Lawyers in Victoria

 

As part of our growing initiative to reduce the level of legal work and documentation that founders have to manage, our law firm, Velletta, Pedersen, and Christie have developed a streamlined process in assisting Founders and Advisors formalize and execute their expectations. Whether your company is in the Idea Stage, Startup stage, or Growth stage, our experienced business lawyers can provide valuable advice to avoid common pitfalls that startup businesses encounter while rapidly expanding.

 

A Cautionary Note

This article provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.


About the Author


Sankar Nair - Business Lawyer Victoria - Velletta, Pedersen, Christie

Written by Sankar Nair

Sankar Nair is an Articled Student at Velletta Pedersen Christie. Sankar has amassed a decade of experience as a successful e-commerce entrepreneur and has lived the advice he shares with new businesses and founders, particularly in contracts. Before graduating from the University of Victoria's Faculty of Law, Sankar was a summer student with Velletta & Company and gained experience in Mergers and Acquisitions, Corporate Finance, and Intellectual Property.

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