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are contracts between companies and advisors who are not their employees. Whenever practical, these agreements should be in writing. Good agreements should set out the scope of the consultant's obligations, understandings as to who owns his work product and the company’s fee payment obligations. If the consultant's duties give him access to company secrets, the agreement should contain secrecy provisions. If they require him to interact with company customers or suppliers, the limitations on his authority should be carefully delineated. Some investors require companies to enter into consulting agreements with them as a condition to funding. These contracts usually require the company to pay a monthly or quarterly fee to the investor for advice management might obtain anyway by virtue of its relationship with the investor. The real purpose of many of these consulting agreements is often to increase the investor's return and improve his access to management. Investors who require consulting agreements often tie the consulting fee to their cost of monitoring the company. Some investors believe consulting agreements improve their communication with management. They argue that managements feel fewer reservations about asking for investor advice when they are paying for it. The fee paid for investor consulting services increases the company's cost of capital and decreases its available cash. Whenever possible, these consulting agreements, and their fees, should be avoided. When avoiding them is not possible, the consulting fee should be reviewed carefully and included in the company's calculation of its true cost of capital. See: Brokers for more information about contracting with consultants to assist in fund raising. See also: Cash Flow, Consultants, Financing Agreements, Management Agreements, Pricing. |
