Advisory shares

The right startup advisor can provide strategic insights, a network of contacts and other valuable services for an early-stage company. If your company doesn’t yet have sufficient cash flow, non-cash compensation and benefits can be a useful way to reward advisors for their support. This kind of equity-based compensation is generally referred to as “advisory shares”. 

What are advisory shares?

Advisory shares are a form of equity compensation that early-stage startups can give to advisors instead of, or in addition to, cash. While they share some similarities with equity given to employees – such as vesting and exercise conditions – advisory shares are not usually issued under a formal incentive plan.

Advisory shares vs. equity

It’s important to note that advisory shares are not a specific security type. The type of equity granted to advisors varies from company to company, depending on location. For instance, UK and European startups typically offer share options to individual advisors or the advisor’s personal service company; in the US, granting stock options or restricted stock awards (RSAs) is more common.

Share options

Share options represent the right to buy actual company shares at a later date for a predetermined strike price (or exercise price). Once an individual exercises their options, they become a shareholder in the company.

While startup employees may receive tax-advantaged share options – such as EMI options in the UK or BSPCEs in France – most advisors don’t qualify for government-approved equity schemes. As such, advisory shares are usually ‘unapproved’ options that trigger taxes upon exercise (i.e. income tax and National Insurance Contributions) and when the shares are sold (i.e. capital gains tax). 

Unapproved share options can be granted to individuals or to the advisor's personal service company.

Why advisory shares are important for startups

Giving advisors a percentage of your company ownership allows you to reward the people who help your business grow, giving them “skin in the game” for your company’s long- term success. There are several benefits to advisory shares: being able to offer non-cash compensation is useful for cash-strapped companies, and some advisors actually prefer equity over cash because of the potential upside. While cash compensation often remains stagnant, shares have the potential to increase in value as your business grows.

However, there are also certain risks involved in issuing advisory shares. Dilution, overcompensation and conflicts of interest are all problems to look out for and approach thoughtfully. 

→ Learn more about creating an advisory board

How to start issuing advisory shares

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

• Set up your cap table and configure share classes

• Create an option pool and allocate shares to the pool

• Define the vesting and exercise conditions

• Draft the necessary documentation (e.g. advisor agreements)

• Review draft securities

• Obtain board and shareholder approval

• Get an updated company valuation

Determining the number of shares

If you decide to offer advisory shares, consider each advisor’s expertise and the current stage of your company when figuring out how much equity to allocate.

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

• The median advisor grant was 0.21% of company shares (down from 0.25% between 2021 and 2023)

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

Determining how many shares to issue individual advisors is a personal choice. Founders  looking for further guidance and information should consult a lawyer.

Creating an advisory share agreement

To ensure you align on clear goals and expectations when working with advisors, especially if equity is involved, it’s sensible to put together a signed agreement outlining:

• The advisor’s domain of expertise

• How they’re going to support your company

• Their expected time commitment

• The amount of equity or other compensation they’ll receive in exchange for their service

If your advisory agreement includes an equity award, it should be expressed as a specific number of shares (equal to a target percentage of company ownership as of the agreement date).

We recommend speaking to a lawyer and your potential advisor to come to an agreement that works for everyone. Ultimately, it depends on how you plan to leverage the advisor’s expertise and experience, so you’ll need to be upfront about what you expect them to contribute.

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” shares over time or at certain milestones, which encourages advisors to commit to supporting your company.

While it’s crucial to implement a vesting schedule for advisory shares, it will differ from a typical employee vesting schedule. According to Amit Bhatti, a lawyer and Principal at 500 Global, “Vesting doesn’t make sense for advisors the same way it does for employees”. This is because startups evolve quickly and the advisors you need at the seed stage are likely to be different from the ones you’ll want at Series B and beyond.

Advisory shares typically vest monthly over the course of two years. Most companies avoid a four-year vesting schedule because advisors tend to deliver most of their value upfront. You can always reconsider your relationship after two years and decide if you want to extend the agreement.

Many advisory share agreements don’t have a vesting cliff, but some companies prefer to include a three-month cliff as a buffer, so they can see whether the relationship will deliver value or not. Advisors may also negotiate single-trigger acceleration of the vesting schedule, which means they’re entitled to all their shares if a specific event occurs – such as a company sale or the termination of the working relationship.

Download the US advisory agreement template

We asked the team at Wilson Sonsini, a leading global law firm, to put together a sample agreement for US founders and business advisors to use as a model.

This advisory agreement sample has been prepared by Wilson Sonsini for informational purposes only. Please note that this is designed specifically for US businesses and has not been adapted for jurisdictions outside of the US. You should consult a legal advisor to tailor the template to your local jurisdiction and your company’s specific needs.

How to talk to an advisor about equity

Before promising equity, it’s worth asking a potential advisor if they would consider investing in your company instead of receiving advisory shares. They’re likely to be more motivated to deliver value if their own money is on the line, and their early commitment will also send a strong signal to future investors.

In Amit Bhatti’s experience, it only makes sense to offer equity to contributors “if the founder feels like they’re going to be demanding on somebody’s time”. When it’s time to negotiate compensation, experienced advisors may want to follow a framework that has worked for them before. It’s up to you to decide if the proposed structure makes sense for your company; if not, work with your lawyer and the advisor to figure out an alternative arrangement that suits both parties.

Best practices for issuing advisory shares

When issuing advisory shares, you’ll want to avoid common issues like conflicts of interest, dilution and overcompensation.

Conflicts of interest

Conflicts of interest can arise if you’re issuing equity to advisors who are involved with competing businesses. It’s also possible for an advisor’s interests to diverge from those of the founders or other investors. To mitigate  these risks, establish clear guidelines and expectations for the advisor's role and contribution.

Dilution and your cap table

As with any type of equity, issuing advisory shares can dilute existing stakeholders. To understand the potential impact on company ownership, review your cap table before issuing equity and weigh up the need for new advisors against the possible dilution.

Incentives and milestones

It’s a good idea to tie advisory shares to specific business milestones or performance metrics, as you would with bonuses or other types of compensation. Vesting schedules can create a sense of accountability and align the advisor's incentives with company goals.

Evaluating performance

The purpose of an advisor is to provide a service to your startup. After setting out clear goals in your advisory agreement, you should regularly assess each advisor's contribution to determine whether they’re meeting the pre-agreed objectives.

Tax implications

Advisory shares can carry tax liabilities for both parties. It’s important to understand the tax treatment of different types of equity in your local jurisdiction before issuing advisory shares. For specific guidance, speak to a professional tax advisor.