Advisors can offer valuable advice when your company is young, but many startups (especially pre-seed, idea-stage ones) don’t have much cash on hand to compensate them. Plus, the typical early-stage advisor may value equity more than cash.
Giving advisors a percentage of the company allows you to reward the people who help your company grow with ownership and “skin in the game.” But issuing equity, even to advisors, comes with risks: Dilution, overcompensation, and conflicts of interest are all problems to look out for and approach thoughtfully.
In this guide to advisory shares, you’ll learn:
- What are advisory shares?
- RSAs vs. options for advisors
- How to make an advisory agreement (free template download)
- How to find and choose startup advisors
- How to talk to an advisor about equity
- How much equity to give to advisors
Advisory shares is an umbrella term for types of equity compensation early-stage startups can give to advisors instead of or in addition to cash. Many people use the term “advisory shares” to mean shares of common stock options or RSAs from an equity incentive plan that companies issue to advisors (similar to equity given to employees). Advisory shares are usually subject to vesting for the duration of the working relationship. Vesting is the process of “earning” the shares over time—it encourages advisors to stay with your company for longer.
There are two main types of equity compensation offered to advisors: restricted stock awards (RSAs) and stock options. The difference between RSAs and options is largely a legal distinction. RSAs are shares bought upfront, and options are the right to buy shares, which are usually delivered later on.
Restricted stock awards (RSAs)
Restricted stock awards (RSAs) are often issued before the first round of financing, when a company hasn’t raised much (or any) money and the fair market value (FMV) is very low. An RSA is a grant of shares of common stock to the recipient, who pays for it either with cash or with services they provide to your company.
The advisor will own the stock as soon as it is granted and any purchase requirements are satisfied. If there are vesting requirements, then the company has the right to repurchase any unvested shares if the advisor stops working with the company.
Some advisors prefer receiving RSAs over options because RSAs can be structured to require a lower cash outlay: If an advisor doesn’t have the cash to exercise options at the company’s FMV, the company can instead grant an RSA for their services, and the advisor will just owe ordinary income taxes on the value of the shares.
Stock options are the right to buy shares at a predetermined strike price (also called the exercise price). There are two main types of options: incentive stock options (ISOs), which are tax-advantaged and can only be issued to employees in the U.S., and non-qualified stock options (NSOs). NSOs trigger taxes both when the options are exercised (ordinary income tax on the difference between the strike price and the FMV at time of exercise) and when the options are sold (capital gains tax on any additional gain).
Vesting schedule for advisor shares
A vesting schedule for advisors is crucial, but it will differ from a typical employee vesting schedule. “Vesting doesn’t make sense for advisors the same way it does for employees” says Amit Bhatti, a lawyer and Principal at 500 Global. That’s because companies change quickly and the advisors you need at the seed stage will likely be different from the ones you want at Series B and beyond.
Advisory share agreements often have a two-year schedule, vesting monthly, with no cliff. Most companies avoid a four-year vesting schedule because most advisors are going to deliver most of their value up front. You can always re-visit the relationship after two years to see if you want to keep going forward.
Some agreements have a cliff of three months, which gives the parties time to sort out whether the relationship will deliver value and work out. Many advisors also negotiate single-trigger acceleration of the vesting schedule, which means they’re entitled to all their shares if a specific event occurs. This event could be the sale of the company, or the company’s termination of the working relationship.
The goals of an advisor relationship can be pretty unclear. Align with your advisor by putting together a signed agreement outlining:
- The advisor’s domain of expertise
- What they’re going to help you with
- Expected time commitment
- The amount of equity or other compensation they’ll get. If the advisory agreement includes an equity award, express it as a specific number of shares (equal to a target percentage of the company as of the date of the agreement).
We asked the team at Wilson Sonsini, a premier global law firm, to put together a sample agreement for founders and business advisors to use as a model.
Download the advisory agreement template below, for free:
This advisor agreement sample has been prepared by Wilson Sonsini for informational purposes only.
Pick your advisors like you would a co-founder. At best, an advisor can be critical to your success as a company; at worst, they can be a distraction and waste your time—or even become a liability.
“You want to kind of shop around for advisors,” says Clayton Bryan, a Partner at 500 Global. For example, if it’s your first time fundraising, it could be helpful to have the ear of someone who’s done it a few times. If your B2B team is strong in data and engineering, you may want someone who has experience selling to Fortune 500 companies. “You’re basically creating a job description,” says Bryan. “Find an advisor that fits not only what’s on paper, but also fits your culture and can work with you.”
First, figure out what type of advisor you need. You want advisors who can help compensate for a weakness you have. You can think of advisors as falling into two broad categories:
- Name advisors: The main benefit of a name advisor is through association. This type of advisor is usually a well-known, respected name in the industry who can provide connections to their network or boost your startup’s profile.
- Practical advisors: Think of a practical advisor as your sounding board. This type of advisor can help with specific work—from hiring and go-to-market strategy to partnerships and more. You can turn to them for help talking through an idea, big or small.
Once you have the idea of what you’re looking for, reach out to your network. Ask former colleagues, current investors, and other founders for recommendations. Research your market and find experts who are helpful. Sometimes a successful relationship can begin with a customized LinkedIn message or cold email.
How to choose an advisor
Advisors get a unique look at the high-level operations of a company, and if they like what they see (and have the resources), they may want to buy in. Sometimes advisors even go on to become key employees at the company.
You’ll know within a couple of months if an advisory relationship is the right fit. It’s also not uncommon for advisors to ask about investing directly in the company with their own money in future financing rounds.
Bryan advises early-stage companies to look for someone who can “teach and maybe mentor someone that’s junior,” not just a temporary advisor. The benefit to finding an advisor who can stick around? “They can speed up that learning curve and then the company can begin to execute at a much faster clip,” says Bryan.
Before promising equity, it’s worth asking a potential advisor if they would invest in your company instead of taking advisory shares. Investing directly gives them a stronger motivation to deliver value because their own money is on the line. It sends a valuable signal to future investors, as well.
Bhatti says it only makes sense to give equity “because of how helpful somebody has been or the founder feels like they’re going to be demanding on somebody’s time.” Experienced advisors might have a framework they’ve used before: Once it comes time to talk compensation, they may offer a structure they’re familiar with. It’s up to you to determine if it makes sense for your company. If it doesn’t, work with your lawyer and the advisor to figure out an arrangement that works.
If you do decide to provide equity, keep in mind the advisor’s level of expertise and the current stage of your company when figuring out the amount. Many suggestions for the amount of equity to allocate to individual advisors come from anecdotal experience.
At Carta, we have data that provides real insight into what founders are offering their advisors. Here are the most common arrangements we saw for advisor shares issued in 2022 for pre-seed companies:
- The median advisor grant was 0.24% of company shares
- Seventy percent of advisor grants were for less than 0.5% of the company
- Forty percent of advisory grants had a two-year vesting schedule, while 26% had a four-year vesting schedule
How to issue advisory shares as an early-stage founder
Document whatever decision you come to with your advisor in an agreement, especially if equity is involved or promised. We recommend you talk to a lawyer and work with your potential advisor on an agreement that works for everyone.
Ultimately, it’s all about how you’ll use the advisor. You have to tell them what you need and expect. “Founders are the ones driving the cadence [of communication].” says Bryan, “They’re the ones building the agendas and holding the expectations in terms of interacting with that advisor.”
Carta can help you issue equity to advisors, investors, or employees, as well as obtain board consent for new stock issues. Early-stage companies with up to 25 stakeholders and up to $1M raised can take advantage of our free Carta Launch.
Start issuing advisory shares with Carta
This article was originally published on June 23, 2020. Companies who have contractually requested that we not use their data in anonymized and aggregated studies are not included in this analysis.
DISCLOSURE: This communication is on behalf of eShares, Inc. d/b/a Carta, Inc. (“Carta”). This communication is for informational purposes only, and contains general information only. Carta is not, by means of this communication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services nor should it be used as a basis for any decision or action that may affect your business or interests. Before making any decision or taking any action that may affect your business or interests, you should consult a qualified professional advisor. This communication is not intended as a recommendation, offer or solicitation for the purchase or sale of any security. Carta does not assume any liability for reliance on the information provided herein.
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