Demos 
Colors 
Docs 
Support 
|
Getting your Trinity Audio player ready...
|
Advisory Shares Meaning: A Complete Guide for Startups
What Are Advisory Shares?
Advisory share is a type of equity compensation that’s given to an advisor for a startup in return of their talent, skills, connections and expertise. Instead of paying them in cash, many companies in the start offer them advisory shares as a way to protect their cash flow, and it’s a good strategy to attract top talented people of their field.
Example:
A startup company that’s starting to develop a marketing tool gives advisory shares to a skilled advisor who will then help them in business related strategies and if the company is profiting because of their shares in the company, they will also get profited.
How Do Advisory Shares Work?
1. The Role of an Advisor
The sole role of an advisor as the name applies is to advise and guide, they have to provide introduction to the field, tell you about the insights. They are not like the board members, higher-ups nor like the employees but still they play a key role in the development of the company.
An advisor helps in fundraising and introducing investors to the company, they will explain all the marketing strategies and how to boost the company.
Their duty is to provide insights on developments of products and procedures and give legal guidance.
2. Advisory Shares as a Form of Equity Compensation
As mentioned above early-stage companies don’t give cash to advisors instead they pay by giving them advisory shares of the company. These shares can be structured in various different ways.
Stock Options
The advisor gets the option to purchase shares at a predetermined price.
Restricted Stock Units (RSUs)
The advisor is granted shares, but they vest over time.
Restricted Stock Awards (RSAs)
Similar to RSUs, but often granted upfront with restrictions.
3. Vesting and Advisory Agreements
Most advisory shares are issued with a vesting schedule, it makes sure that the advisors are engaged with work over the years. A standard vesting schedule is about 1 to 2 years, while the shares are earned monthly.
Example:
A startup grants an advisor 1% equity, vesting over two years, in exchange for strategic guidance and networking help.
Types of Advisory Shares
Advisory shares can be of different types as per the advisor.
Non-Qualified Stock Options (NSOs)
Allows the advisor to buy shares at a future date.
Restricted Stock Units (RSUs)
The advisor gets actual shares but must wait for them to vest.
Restricted Stock Awards (RSAs)
The advisor gets shares upfront, but restrictions apply.
Confusion between Advisory Shares and Regular Shares
Regular Shares:
Regular shares are received by investors and employees
They have full ownership rights of shares
Regular shares are often easy to transfer
Advisory Shares:
Advisory shares are only received by advisors in a startup
They don’t have complete rights, often like non-voting.
Advisory shares can be a bit difficult to transfer rather than regular shares
Benefits of Advisory Shares for Startups
It helps them to find advisors without having them to pay outrageous rates.
Maintaining good cash flow and the advisors are also getting paid.
It promotes dedicating working over the years via vesting.
It boosts the startup network when more experienced and skilled professionals are in the field.
Example:
A startup company hires an excellent advisor by giving them ownership of shares instead of cash.
Pros and Cons of Advisory Shares
Pros of Advisory Shares
- Economical approach to acquire professional advice.
- Helps create trust and hire investors.
- Encourages advisers to be actively engaged.
Cons of Advisory Shares
- Like normal staff, advisors cannot be as dedicated as they don’t count as employees.
- Requires legal agreements and proper documentation.
- Possibility of equity reduction in case too many shares are printed.
How to Issue Advisory Shares in a Startup
Determine the Number of Shares
Decide how much equity in the startup will go to advisers.
Set Up a Vesting Schedule
Protect the corporation by requiring advisors to earn their shares over time.
Draft an Advisory Share Agreement
Clearly define expectations and conditions.
Issue Advisory Shares
Work with legal and finance teams to finalize the share grant.
Frequently Asked Questions (FAQs)
What percentage of equity should startups give to advisors?
Typically 0.1% – 1% total equity, depending on the advisor’s role and experience.
Are advisory shares the same as stock options?
Not always—advisory shares can take the form of stock options or restricted stock.
Can advisors sell their shares immediately?
Usually not—advisory shares often come with vesting schedules and restrictions.
Final Thoughts on Advisory Shares
Advisory shares are a form of equity pay given to advisors in a business to reward their work. These shares are sometimes used to attract strategic direction. The advisory share agreement includes important components, including vesting schedule.
While advisory shares can help firms develop, they should be carefully managed to minimize equity reduction.
Thinking about employing advisory shares in your startup? Make sure you have a clear advisory agreement in place and allocate equity carefully!
-
Previous Post
Form W2 vs W4: Key Differences and How to File Each Form
Post a comment
Related Posts
Form W2 vs W4: Key Differences and How to File Each Form
What is the $1,000-a-month rule for retirement? For all citizens of U.S. who are nearing…
Essential CPA Services for Small Business CFO
What is the $1,000-a-month rule for retirement? For all citizens of U.S. who are nearing…
Financial KPIs
The 5 Best Practices for Cashflow Management A robust cash flow management is important for…
Startup Capital
The 5 Best Practices for Cashflow Management A robust cash flow management is important for…
