What Are Advisory Shares and How They Work for Startup Founders
Understand what advisory shares are, how they’re structured, and why founders use them to attract experienced advisors.
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Early-stage founders often bring on advisors to help with product decisions, fundraising, hiring, or industry connections. To compensate these advisors, startups sometimes grant advisory shares, which are used specifically to reward ongoing advisory contributions.
What are Advisory Shares?
Advisory shares are equity grants given to startup advisors in exchange for strategic guidance, industry expertise, or access to valuable networks. Early-stage founders often use advisory shares to bring experienced operators and investors into the company without paying hefty cash fees upfront.
Instead of cash compensation, advisors receive a small ownership stake that aligns their incentives with the business’s long-term success.
In practice, advisory shares are not a separate class of stock. They are typically issued as stock options or restricted stock that vests over time. This structure ensures advisors contribute meaningfully over an agreed period rather than offering one-off advice with no ongoing commitment.
For founders operating with a limited runway, advisory shares can be a practical way to conserve cash while still accessing high-quality guidance that helps the company grow faster and avoid costly mistakes. When structured properly, advisory equity creates long-term alignment without giving up control.
How Advisory Shares Are Structured and Paid
Advisory shares are issued through formal equity grants and documented in written advisory agreements. The equity typically vests over one to two years, often with a short cliff, to reflect the advisor’s ongoing involvement and front-loaded impact.
Vesting schedules for advisors are typically shorter and structured differently from employee vesting. Advisors often deliver their greatest impact early in the relationship, such as by providing strategic direction or key introductions, so advisory equity commonly vests over a condensed timeframe tied to the advisory engagement rather than over the long term.
There is no fixed rule for how much equity advisors receive. Market norms typically range from 0.25% to 1% per advisor, and when a company forms an advisory board, it is common to reserve 5% of total equity to be shared across its members. Earlier-stage companies usually offer higher percentages to compensate for higher risk.
Non-Qualified Stock Options (NSOs)
Most advisory shares are granted as Non-Qualified Stock Options. An NSO gives the advisor the right to purchase a set number of common shares at a fixed exercise price, usually based on the company’s fair market value or most recent 409A valuation at the time of grant.
Restricted Stock Agreements (RSAs)
Less commonly, advisory shares are issued through Restricted Stock Agreements. An RSA is a direct grant of shares that remain subject to vesting and transfer restrictions. RSAs are more common at very early stages, when the company valuation is low or difficult to determine.
How Advisory Shares Compare to Other Equity Types
Advisory shares function similarly to equity granted to early employees, usually as common stock or options. They are designed for incentive alignment rather than control. Advisory equity is commonly non-voting and subject to strict transfer restrictions, vesting schedules, and long-term illiquidity.
Issuing advisory shares does contribute to dilution, meaning existing shareholders own a smaller percentage after new equity is granted. This tradeoff is intentional and often worthwhile when advisors materially increase the company’s chances of success.
Frequently Asked Questions:
Do advisory shares require board approval?
Yes. Advisory equity grants are typically approved by the board and documented in the same manner as other equity issuances.
Can advisory shares be revoked?
Unvested shares usually return to the company if the advisory relationship ends early.
Are advisory shares taxed differently from employee equity?
Tax treatment depends on the equity type and jurisdiction, so advisors should seek professional tax advice.
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