Advisory shares

The right startup advisor can provide strategic insights, a network of contacts, and other valuable services for an early-stage company. But for startups that may not yet have significant cash flow, rewarding your advisors often comes down to non-cash compensation and benefits. Equity-based compensation for advisors is generally referred to as “advisory shares.” 

What are advisory shares?

Advisory shares are a type of equity compensation that early-stage startups can give to advisors instead of or in addition to cash. Advisory shares are not a specific type of equity, but many people use the term to describe shares of common stock options or restricted stock awards (RSA) from an equity incentive plan (similar to equity given to employees). 

Why advisory shares are important for startups

Giving advisors a percentage of your company allows you to reward the people who help your business grow—giving them “skin in the game” for your company’s long term success. While non-cash compensation is one of the key benefits of advisory shares for cash-strapped companies, some advisors actually prefer equity over cash because of the potential upside (company stock has the potential to appreciate as your business grows, whereas cash compensation often remains stagnant). 

But issuing advisory shares comes with serious risks too: Dilution, overcompensation, and conflicts of interest are all problems to look out for and approach thoughtfully. 

→ Learn more about creating an advisory board

Types of advisory shares

There are two main types of equity compensation offered to advisors: RSAs and stock options. The difference between RSAs and options is largely a legal distinction. RSAs are shares issued upfront; options are the right to buy shares in the future at a set price.

Restricted stock awards (RSA)

Restricted stock awards (RSA) 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) of the company’s common stock 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.

An advisor will own RSAs as soon as they are granted and any purchase requirements are satisfied. If there are vesting requirements for the equity awards, 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 stock options because RSAs can be structured to require a lower cash outlay: If an advisor doesn’t have the cash to exercise stock 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

Stock options are the right to buy actual shares at a predetermined strike price (also called the exercise price). There are two main types of options: incentive stock options (ISO), which are tax-advantaged and can only be issued to employees in the U.S., and non-qualified stock options (NSO). 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).

→ Learn more about ISO vs NSO tax treatments

Advisory shares vs. equity

Advisory shares are a class of equity compensation given to a company’s advisors, but they are not a specific type of equity. The type of equity given to advisors can vary from company to company.

Because advisors generally receive equity earlier in a company’s lifecycle, it’s rare for them to receive another type of stock: restricted stock units (RSU). 

→ Learn more about the differences between RSAs and RSUs

How to start issuing advisory shares

Issuing equity to your advisors works like any other type of equity issuance. Depending on your company, you might be able to skip some of the steps outlined below if you’ve already issued shares to employees or other service providers.

• Configure share classes

• Set up your equity pool

• Add templates

• Enter draft information

• Review draft securities

• Obtain board members’ approval

• Company sign-off

• Get a new 409A valuation

→ Learn more about issuing securities and how it works on Carta

Determining the number of shares

If you decide to provide advisory shares, keep in mind the advisor’s 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. 

Carta’s compensation data provides real insight into what founders are offering their advisors. Here are the most common arrangements we saw for advisor shares issued in the first half of 2024 for pre-seed companies:

• The median advisor grant was 0.21% of company shares (down from .25% in 2021 through 2023)

• Only 10% of pre-seed advisors received 1% or more equity

Determining how many shares to issue your advisors is a personal choice. Founders looking for more information or guidance should talk to their lawyers, or can reach out to an expert at Carta to learn how we can help issue advisory shares.

Creating an advisory share agreement

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. 

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.

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.

Vesting schedules and cliffs

Advisory shares are usually subject to a vesting period that lasts 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.

A vesting schedule for advisory shares 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 advisory share 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.

How to talk to an advisor about equity

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 “if 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.

Advisory shares best practices

Dilution, overcompensation, and conflicts of interest are all problems to look out for and approach thoughtfully when dealing with advisory shares.

Conflicts of interest

Conflicts can arise if you’re issuing equity to advisors who are involved with competing companies. There’s also the potential for an advisor’s interests to diverge from those of the company's founders or other investors. Establish clear guidelines and transparency about the advisor's role and expectations to mitigate these risks.

Dilution and your cap table

Granting advisory shares—like any type of equity issuance—can dilute existing equity holders’ shares. Review your cap table before issuing any new ownership and weigh the need for new advisors with the potential impact on your cap table.

Incentives and milestones

Tie advisory shares to specific milestones or performance metrics (similar to how you’d set up other types of compensation). Vesting schedules help create accountability and align the advisor's incentives with the company's goals.

Evaluating performance

An advisor is providing a service to your startup, similar to an employee. Regularly assess your advisor's contributions to determine if they are meeting agreed-upon goals within your advisory agreement.

Tax implications

Advisory shares can carry tax consequences for both parties, depending on the type of equity. It's important to understand the tax treatment of the type of shares or stock awards you choose to grant.  Learn more about capital gains taxes or talk to a professional tax advisor.

Companies who have contractually requested that we not use their data in anonymized and aggregated studies are not included in this analysis.