It is common for entrepreneurial teams to work with consultants to gain access to specialized skills and information. Early stage teams try and remain small with minimal employment commitments until the product and company reach a certain level of maturity and development.
Once certain milestones have been reached and or funding secured the startup can hire more employees. Until that time, small nimble teams often work with consultants to assist with product and business development. As mentioned in the entrepreneurship book "Make It Big, Crossing the Entrepreneur's Gap," consulting agreements are utilized to specify the relationship between the consultant and the start-up and define the work to be completed by the consultant. The agreement example below illustrates many of the common clauses in such a contract.
This particular contract is a research and development focused agreement and is heavy on the intellectual property clauses. Consulting agreements more focused on marketing or business services can shorten this area. The first paragraph (5) is what is called a "what's mine is mine and what's yours is yours" clause. This is the most contenscious clause in the intellectual property section of the agreement. Most of the negotiation is around what gets developed and how broad does the ownership of the company extend.
This agreement also specifies that a consultant will not engage with a competing company. This benefits the company more than the consultant and consultants will often remove this restriction from their template agreements.
Payment for consulting services can be handled a number of ways. Consultants commonly work under three methods (1) hourly, (2) hourly with a cap, or (3) milestone based. Hourly is the most flexible for both parties. In this case the consultant will provide the company a periodic invoice listing the activities performed and hours used, total the hours, and multiply by the agreed upon hourly rate. Hourly rates are based on the 'going rate' in the industry for the type of service performed and the experience of the consultant. For example, a mechanical engineering consultant with 2 years of experience may bill $50 / hour whereas an ME with 15 years of experience may bill $150 / hour. These rates fluctuate with the economy as well. Higher unemployment rates drive hourly rates down.
The hourly plus cap simply adds a cap to the amount the consultant can bill for the whole project. This requires the company to adequately describe the project boundaries and timeline to the consultant such that the consultant can estimate the total amount of work involved and propose a budget cap for the whole project. If mutually agreed the consultant simply bills hourly until the project is complete, or until the cap is reached, whichever is sooner.
Milestone driven is similar to hourly plus a cap except that the consultant will issue to the company invoices once certain milestones are reached. For example a project may include four phases for example specification, development, test, and production. The budget may be $20,000 with each phase equaling $5,000. In this case, the consultant delivers work for each milestone with an invoice for that phase. In practice work is typically delivered and then accepted by the company. Once 'accepted' the consultant can issue an invoice for the milestone. Depending on the project this arrangement can be simple or complex with definitions for acceptable milestones detailed in Exhibit A.
It is common to time bound the intellectual property clause since consultants work for a variety of companies and often on similar projects. Five years is used for slower moving industries such as military and biotech whereas three years is more applicable in fast moving and highly innovative markets such as high tech.
“Many of the entrepreneurs we work with used consulting agreements at startups to engage with consultants,” says Marc Theeuwes, Consulting Associate Professor at Stanford University, and former venture capitalist, “consultants are a great way to access talent and make focused progress on a project basis.”
Consultants can be very helpful to start-ups. Many help startups with either product development or customer development. And, if things go well, many end up joining the startup when the time is right. Consulting relationships and agreements give startups flexibility to make progress in key areas by accessing available talent for short and long term projects.
************** CONSULTING AGREEMENT *******************
This consulting agreement (the "Agreement") is entered into and is effective as of ____________________________ (the "Effective Date") by and between ____________________________ ("Company") and _______________________ ("Consultant").
The Company desires to retain the Consultant as an independent contractor to perform consulting services for the Company from time to time and the Consultant is willing to perform such services, on the basis set forth more fully below. In consideration of the mutual promises contained herein, the Company and the Consultant mutually agree as follows:
1. Services. The Consultant shall provide to the Company the services set forth in Exhibit A in accordance with the terms and conditions contained in this Agreement. The Consultant is not presently retained by any entity that manufactures or sells products competitive with those of the Company and agrees not to accept such retention during the term of this Agreement without prior written approval of the Company. The Consultant may not subcontract all or any part of the services to be provided hereunder without the prior written consent of the Company. The Consultant shall coordinate work efforts and report progress regularly to the individual set forth in Exhibit A.
2. Payment for Services Rendered. The Company shall pay the Consultant the fee set forth in the Exhibit A for the performance of the services. The Company shall reimburse the Consultant for all reasonable direct out-of-pocket expenses incurred by the Consultant with respect to the services, including, but not limited to, expenditures for travel, phone, postage, photocopies, and materials. Expenditure of funds over $______ for any activity requires prior approval of the Company.
3. Relationship of Parties. The Consultant shall perform the Services under the general direction of the Company, but the Consultant shall determine, in the Consultant's sole discretion, the manner and means by which the Services are accomplished, subject to the express condition that the Consultant shall at all times comply with applicable law. The Consultant is an independent contractor and the Consultant is not an agent or employee of the Company, and has no authority whatsoever to bind the Company by contract or otherwise. The Consultant will not act as an agent or be deemed an employee of the Company for the purposes of any employee benefit program, income tax withholding, FICA taxes, unemployment benefits or otherwise. The Consultant agrees that all work necessary to complete the services shall be performed off-site from the Company premises with the sole exception of on-site meetings as necessary. The Consultant shall not enter into any agreement or incur any obligations on the Company’s behalf, or commit the Company in any manner without the Company’s prior written consent.
4. Employment Taxes and Benefits. The Consultant acknowledges and agrees that it shall be the obligation of the Consultant to report as income all compensation received by the Consultant pursuant to this Agreement and the Consultant agrees to indemnify the Company and hold it harmless to the extent of any obligation imposed on the Company to pay any withholding taxes, social security, unemployment or disability insurance or similar items, including the interest and penalties thereon, in connection with any payments made to the Consultant by the Company pursuant to this Agreement.
5. Invention Ownership. All designs, artwork software programs, brochures, manuals, products, procedures, drawings, notes, documents, information, materials, discoveries and inventions (hereafter "Information") made, conceived or developed by the Consultant alone or with others which result from or relate to the Services, or which the Consultant may receive from the Company while performing the Services, shall be the sole property of the Company. The Consultant agrees to assign, and does hereby assign, to the Company and its successors and assigns, without further consideration, the Consultant’s entire right, title and interest in and to the Information whether or not patentable or copyrightable. Designs and inventions made, conceived or developed by the Consultant alone or with others while executing Services in Exhibit A which do not result from or relate to the Services shall be the sole property of the Consultant. The Consultant shall treat all of the Information as the proprietary property of the Company.
(a) Invention Disclosure. The Consultant shall promptly and fully disclose to the Company any and all Information including inventions, improvements, discoveries, developments, original works of authorship, software, trade secrets or other intellectual property conceived, developed or reduced to practice by the Consultant during the term of this Agreement and in any way relating to (a) the actual or anticipated research and development of the Company, or (b) the services performed by the Consultant under this Agreement.
(b) Invention Protection. The Company shall have the sole right to determine the method of protection for any such Information, including the right to keep the same as trade secrets, to file and execute patent applications thereon, to use and disclose the same without prior patent application, to file registrations for copyright or trademark thereon in its own name, or to follow any other procedure that the Company deems appropriate. The Consultant further agrees to execute all applications for patents and/or copyrights, domestic or foreign, assignments and other papers necessary to secure and enforce rights related to the Information. The Consultant agrees that the Company has a power of attorney to apply for in the Consultant's name, and to execute any applications and/or assignments reasonably necessary to obtain any patent, copyright, trademark or other statutory protection for such Information in the Company's name as the Company deems appropriate. These obligations to disclose, assist, and execute shall survive termination of this Agreement. At the Company's option, it shall be entitled to use the name of the Consultant in advertising and other materials.
(c) Prior Inventions; Intellectual Property of Consultant: Should the Consultant in the execution of Services utilize any inventions, improvements, discoveries, developments, original works of authorship, software, trade secrets or other intellectual property developed prior to this agreement, the Consultant shall immediately inform the company in writing, describing the intellectual property, and hereby grant the Company a non-exclusive, transferable, royalty-free, perpetual license to use that intellectual property for the purpose of the Service.
6. Confidentiality. The Consultant agrees to hold the Company's Confidential Information in strict confidence and not to disclose such Confidential Information to any third parties. For purposes hereof, "Confidential Information" shall include all confidential and proprietary information disclosed by the Company including but not limited to technical and business information relating to the Company's current and proposed products, research and development, production, manufacturing and engineering processes, costs, profit or margin information, finances, customers, suppliers, marketing and production, personnel and future business plans. "Confidential Information" also includes proprietary or confidential information of any third party who may disclose such information to the Company or the Consultant in the course of the Company's business.
(a) The Consultant agrees not use (except for the Company’s benefit) or divulge to anyone either during the term of this Agreement or thereafter any of the Company’s trade secrets or other proprietary data or information of any kind whatsoever acquired by the Consultant.
(b) The Consultant agrees to return to the Company any notebook, data, computer files, information or other material acquired or compiled by the Consultant in carrying out the terms of the Agreement upon completion or termination of this Agreement. However, the Consultant may keep one copy of such material for archival purposes.
(c) The Consultant represents that performance of the terms of the Agreement does not and will not conflict with the terms of any agreement to keep in confidence proprietary information and trade secrets acquired in confidence or in trust prior to the consulting relationship with the Company. The Consultant will not disclose to the Company, or induce the Company to use, any confidential or proprietary information or material belonging to any third party.
(d) The obligations of each receiving party hereunder shall survive until such time as all Confidential Information of the other party disclosed hereunder becomes publicly known and made generally available through no action or inaction of the receiving party or ____ years, whichever is shorter.
(e) The above obligations shall not apply to Confidential Information which is already known to the Consultant at the time it is disclosed, or which before being divulged either (i) has become publicly known through no wrongful act of the Consultant; (ii) has been rightfully received from a third party without restriction on disclosure and without breach of this Agreement; (iii) has been independently developed by the Consultant; (iv) has been approved for release by written authorization of the Company; (v) has been disclosed pursuant to a requirement of a government agency or of law.
7. Term and Termination. Unless terminated in accordance with the provisions of this section, the services provided by the Consultant to the Company shall be performed during the period set forth in Exhibit A. This Agreement shall commence on the Effective Date and shall continue until terminated. Either party may terminate this Agreement in whole or in part at its convenience upon seven (7) days written notice to the other party if no Services are in progress. Such termination shall be effective in the manner and upon the date specified in said notice and shall be without prejudice to any claims which one party may have against the other. In the event of such termination the Company shall be obligated to reimburse the consultant for services actually performed by the Consultant up to the effective date of termination. Upon the termination of this Agreement for any reason, each party shall be released from all obligations and liabilities to the other or arising after the date of such termination, except that any termination shall not relieve the Consultant or the Company of their obligations under Paragraphs "Confidential Information" and "Inventions", nor shall any such termination relieve the Consultant or the Company from any liability arising from any breach of this Agreement.
8. General
(a) Complete Understanding. This Agreement, including Exhibit A attached hereto and made a part hereof, constitutes and expresses the entire agreement and understanding between the parties and supersedes all prior understandings and agreements. All previous discussions, promises, representations and understandings between the parties relative to this Agreement, if any, have been merged into this document. The terms and provisions of this Agreement shall be binding on and inure to the benefit of the parties, their heirs, legal representatives, successors and assigns.
(b) Modification. This Agreement may not be and shall not be deemed or construed to have been modified, amended, rescinded, canceled or waived in whole or in part, except by written instruments signed by the parties hereto. No failure on the part of either party to exercise, and no delay in exercising, any right or remedy hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right or remedy hereunder preclude any other or further exercise thereof or the exercise of any other right or remedy granted hereby or by any related document or by law.
(c) Pre-existing Obligations. The Consultant represents and warrants that the Consultant is not under any pre-existing obligation or obligations inconsistent with the provisions of this Agreement.
(d) Assignment. The rights and liabilities of the parties hereto shall bind and inure to the benefit of their respective successors, executors and administrators, as the case may be, provided that, as the Company has contracted for the Consultant's services, the Consultant may not assign or delegate its obligations under this Agreement either in whole or in part without the prior written consent of the Company.
(e) Governing Law; Severability. This Agreement shall be governed by and construed in accordance with the laws of the State of [enter State of choice]. If any provision of this Agreement is for any reason found by a court of competent jurisdiction to be unenforceable, the remainder of this Agreement shall continue in full force and effect. The federal and state courts within the State of [enter State of choice] shall have exclusive jurisdiction to adjudicate any dispute arising out of this Agreement. The parties consent to personal jurisdiction of the federal and state courts within [enter State of choice] and service of process being effected by registered mail sent to the address set forth at the end of this Agreement.
(f) Equitable Relief. Because the Services are personal and unique and because the Consultant shall have access to and become acquainted with the confidential information of the Company, the Consultant agrees that the Company shall have the right to enforce this Agreement and any of its provisions by injunction, specific performance or any other equitable relief with prejudice to any other rights and remedies that the Company may have for the breach of this Agreement.
(g) Attorney's Fees. If any action at law or in equity is necessary to enforce the terms of this Agreement, the prevailing party shall be entitled to reasonable attorney's fees, costs and expenses in addition to any other relief to which such prevailing party may be entitled.
(h) Notices. Any notices required or permitted hereunder shall be given to the appropriate party at the address specified below or at such other address as the party shall specify in writing. Such notice shall be deemed given upon personal delivery to the appropriate address or sent by certified or registered mail, three days after the date of mailing. Email notices are acceptable to the email contacts below and those in Exhibit A provided such notices are tracked with proof of delivery by the sender.
IN WITNESS WHEREOF, the parties hereto have signed this Agreement as of the date written below.
Company Consultant
Company Name: _______________________ ___________________________
Signatory Name: _______________________ ____________________________
Title: _______________________ ____________________________
Signature __________________________ ____________________________
Date __________________________ ____________________________
Email __________________________ ____________________________
EXHIBIT A
A. Project Assignment: [enter the name of the project] under Consulting Agreement dated _____________.
Consultant email __________________.
Company email __________________.
B. Project Scope: The Consultant shall render such services as the Company may request in connection with ________________. [Enter the details of the project and scope].
C. Schedule of Work: The work will commence on __________ and end on ___________. Consultant will submit weekly reports to the Company contact: ______________. The Consultant reserves the right to adjust the schedule in the event that the Company fails to meet agreed deadlines for submission of material or makes changes that are out of the Project scope.
D. Fees and Reimbursement:
(i). Fee: ____________. [Note: Fees can be hourly, weekly, or schedule of payments based on milestones]. If hourly, invoices for hours and work completed and expenses incurred shall be submitted to the Company every two weeks.
(ii). Reimbursement for the following, as approved in advance by the Company: [enter a list of anticipated direct costs].
(iii). The Consultant shall invoice the Company for services and expenses and shall provide receipts or other documentation of expenses as the Company might request, including copies of time records.
(iv). Payment Terms: The Company will be invoiced on the 15th and last day of the month. Payment terms are net 30 days from receipt of invoice.
************** End Agreement ****************
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Disclaimer: Material provided herein is for illustrative and educational purposes only. If you require the use of these or similar documents, you should seek the advice of a legal attorney.
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