Advisory Shares are an important tool used by startups to incentivize and reward advisors who provide valuable guidance and support to the company. Understanding the ins and outs of advisory shares is crucial for startup founders looking to build a strong advisory board and grow their business.
What are Advisory Shares?
Advisory Shares are a form of equity compensation granted to individuals who offer advice and expertise to a startup. These individuals, known as advisors, provide valuable insights, mentorship, and networking opportunities to the company in exchange for a stake in its future success.
How Advisory Shares Differ from Regular Shares
Advisory Shares differ from regular shares in that they are specifically issued to advisors and not to employees or founders. While both types of shares represent ownership in the company, advisory shares are often subject to different terms and conditions.
Why Do Startups Grant Advisory Shares (and Who Gets Them)?
Startups grant advisory shares to attract experienced and knowledgeable advisors who can contribute to the company’s growth and success. Advisors can range from industry experts to successful entrepreneurs and investors. Advisory shares align the interests of these advisors with the long-term success of the startup.
Who Issues Advisory Shares?
Advisory shares are typically issued by the startup’s founders or management team. The decision to issue advisory shares is made by the company, and the terms of the grant are outlined in an advisor agreement.
Who Gets Advisory Shares?
Advisory shares are given to individuals who serve as advisors to the startup. These individuals can bring valuable skills, experience, and industry connections that can significantly impact the company’s growth.
What are the Types of Advisory Shares?
Two Types of Advisory Shares
Advisory shares can take different forms, with two common types being:
- Restricted Stock Units (RSU): RSUs are a promise to issue shares to advisors in the future, typically subject to a vesting schedule or achievement of specific milestones.
- Stock Options: Stock options give advisors the right to buy shares in the company at a predetermined price (the exercise price) within a specified period.
Advisory Shares: Pros and Cons
Advisory Shares offer several advantages and disadvantages for both startups and advisors:
- Pros include aligning interests, incentivizing advisors, and access to valuable expertise.
- Cons include potential dilution of founders’ ownership and administrative complexity.
How Advisory Shares Work
Advisory Shares are typically governed by an advisor agreement that outlines the terms of the grant, vesting schedule, and other conditions. Advisors earn their shares based on their contributions to the company over time.
Key Considerations for Founders When Issuing Advisory Shares
Founders should carefully consider several factors when issuing advisory shares, such as the advisor’s value, equity allocation, vesting period, and the potential impact on the company’s ownership structure.
Startup Advisor Agreement
A Startup Advisor Agreement is a formal contract that outlines the terms and conditions of the advisory shares grant, including vesting schedule, equity percentage, and expectations for both the advisor and the startup.
The Founder/Advisor Standard Agreement Template
The Founder/Advisor Standard Agreement (FASA) template is a widely-used document that simplifies the process of granting advisory shares, providing a standardized framework for startups and advisors.
Advisory Shares Vesting Schedule
The vesting schedule outlines the timeline over which advisors earn their shares. Common vesting schedules include monthly, quarterly, or annual vesting with a cliff period.
How Much of the Company’s Total Equity Should You Give to Advisors?
There is no one-size-fits-all answer to this question. The equity percentage given to advisors can vary depending on their value, expertise, and contributions to the company. Founders must strike a balance between incentivizing advisors and preserving the company’s overall ownership structure.