How to use a consulting agreement to raise capital? A contract for consulting is a legally binding document that confirms the client's need for assistance from an expert. It's possible to use a consulting agreement to raise capital.
Consulting is not structured arbitrarily. It is rare for clients to offer their consultants incoherent goals, a blank cheque with no timeframe, or the ability to divulge company secrets to anyone they like. Some clients may prefer a more relaxed approach to their interactions with their consultants; these companies nearly always have some rules that govern how the contractors work. Also, these terms are usually outlined in an agreement for consulting. In this article, we’ll explore the definition of a consulting agreement. We’ll review the main components you’ll find in a typical one and learn how to use consultation agreements for capital raising. Let’s start!
What is Capital Raising?
Capital raising definition is the process by which the company seeks to raise funds from other sources to reach its strategic objectives. Such objectives may include investing in developing its own business or investing in other properties, such as – for instance, M&A joint ventures, M&A, etc.
Based on your company’s dimensions, there are various methods to raise capital. The method of raising capital for a private business is, for instance, different from that for public companies. Here are some typical ways of capital raising that are suitable for businesses of different sizes:
- Funds for VC
- Private or public business incubators
- Family and friends
- Seed investors
Small and Medium-Sized Companies (SMEs)
- Family offices
- Investors in private equity (those targeted at small and medium-sized enterprises)
- Asset managers and wealth funds
- Private equity investors (those targeted at larger corporations)
- Initial Public Offering (IPO)
- Family offices
What Is a Capital Raise and How Does It Work?
In simple terms, it is when an organization has a strategic plan to grow and is presented with a lender (if the raise is a debt raising) or a willing investor (in the case of an equity raising). When the lender or investor has concluded the due diligence process, an arrangement to swap funds for equity or debt is reached and signed. As with all business transactions, capital raising needs a lot of research and preparation. If you’re discussing the risk of committing large amounts of money for a commercial idea, maximizing returns on investment is an important consideration. The more proof a company has of its potential growth through projections, sound planning for business, financials or market research, marketing strategy IP, etc. more likely it is to secure a high-value outcome.
How to Write a Consulting Agreement to Raise Capital
A consultation agreement is composed of several elements that make up it:
The agreement should begin with the name of the firm and the advisor.
2. Payment Terms
In detail, describe the payment terms in the contract, including the exact amount, the specified currency, and the payment method.
If the consultant is employed for a limited period, describe the date when the payment is paid. If the consultant is hired regularly, explain the timeframe of the payments and how they will be divided.
3. Scope of Work
This section offers a detailed explanation of the duties the consultant must fulfill. It should highlight the service they’ll provide. Also, it is important to ensure that the agreement outlines the details as, without it, it’s impossible to know if the consultant did an excellent job or not.
It is recommended to include an exhibit in the agreement that will outline the various duties of the consultant, and additional tasks could be added as time goes by (without altering or revising the entire agreement).
4. Consulting Period
Define the length of time that the consultant will be working with the company. If there are continuous or monthly requirements for consulting, ensure you write the terms for them.
5. Non-Competition Clauses
When you engage an expert, it’s assumed that they will not be conducting business directly with one of your competitors. It’s an ethical dilemma for the contractor. Also, it gives them an unfair advantage because they may reuse work for a different business.
A non-competition clause outlines which businesses they cannot collaborate with and also protects your company. But, the clause needs to be fair. If you’re too strict, it is basically absconding business from the consultant unfairly.
6. Intellectual Property Clauses
The agreement should cover the rights to use the work performed by consultants. Also, the copyright holder is determined based on the contract.
In some instances, consultants will grant the client full ownership of the work or product. Still, in other situations, consultants will demand the right to use the product in case it’s unlawfully distributed at some point shortly.
The most beneficial result for the business hiring consultants is to have the right to use the physical documents and the copyright they hold. In such a situation, the consultant could request greater compensation.
7. Confidentiality Clauses
Explain the reason why the work of the consultant needs to be kept confidential and what happens when sensitive information leaks out. Define what information must stay private and which is accessible for public inspection. Define the penalties for breaking these confidentiality clauses, regardless of whether they are legal or financial in nature.
8. Breach of Contract Clause
The final clause should define what will happen when the consultant does not comply with the contract. Define the penalties for breaching each one of these clauses.
9. Dispute Clauses
This section outlines the rules to deal with the cases of issues among the two parties. It should include all rules that both parties need to follow.
10. Signing Area
In the end, you should provide space for both parties to agree to the agreement, which makes it legally binding.
11. Termination Clauses
The conditions to be listed would apply to the contract’s expiration, like contingencies or any changes in the demand.
Due to the specifics of creating a consulting agreement, making one is impossible on paper. Even using software like MS Word, you can’t create documents that are in line to meet the requirements in the twenty-first century.
A consultation agreement must be drafted using an open platform that permits both of you to discuss the document in real time.
There must be a method for you to comment on specific lines of text while working remotely, as is typically the case with consultants.
- Reasons for Termination of Consulting Agreement
- Agreements for Equity Compensation
- What Is an Independent Consultant Agreement?