If there was a #1 reason for startups failing, that would be the lack of relevant expertise and experience. Getting advice and mentorship from people who’ve walked the walk in your field can (and often does) turn the tide for a startup. 

The problem is, this advice often comes with a heavy price tag that most companies, at least in the early stages, can’t afford. And even if you’ve got the cash to spare, there is another concern: paid consultants lack vested interest in your venture. 

They might have all the experience, but the lack of skin in the game might devoid you of the reassurance that your advisors will do whatever it takes to get you to succeed.

For that reason, some founders resort to offering advisory shares—a stake in the company granted to external advisors in exchange for helping them grow. As appealing as it is, however, this method—just like anything that involves giving up your ownership—comes with its set of pitfalls and requires careful planning and consideration.

Having walked the startup path and advised dozens of companies on how to succeed, we will share everything you need to know about advisory shares.

Here’s what you’ll learn:

  • What are advisory shares? How do they work?
  • What are the pros and cons of advisory shares for startups?
  • What should a startup advisor’s compensation be?
  • How to look for advisors?
  • How to choose an advisor?
  • What goes into a startup/advisor agreement?

We also provide an editable advisory agreement template for founders in the end of the article. 

Let’s get into it.

What are advisory shares

Advisory shares (also stock advisory) are a form of equity compensation to external advisors like consultants, industry experts, or mentors, for providing strategic advice, sharing their hard-earned experience or network, and generally facilitating the company’s growth.

The shares come with a vesting schedule, meaning the advisor earns them over time by contributing to the company. This way, the advisors are incentivized to commit to the company’s strategic goals and deliver ongoing value.

Types of advisory shares

There are two types of advisory shares: stock options and restricted stock units (RSU). In a nutshell, with stock options, advisors can buy the preferred number of shares if the price is right, but with RSUs, they just wait for a predetermined number of shares to land in their lap once they’re ready.

Stock options

Stock options are the right to buy company stock, normally as non-qualified stock options (NSO), at a predetermined strike price.

The idea is if the company’s stock value increases, advisors can buy the stock cheaper and potentially sell it at a higher market price for profit, which will cover their advisory services. Advisors can do so whenever they decide but within a specified timeframe.

Tax considerations: When advisors exercise their NSOs (buy stock options), the difference between what they pay for the stock and its current market value is taxed like regular income. If they decide to sell the shares, depending on the holding period, the profit is subject to income or capital gains tax, the latter usually being smaller to incentivize investment.

Restricted stock awards (RSAs)

RSAs are shares of common stock granted to the advisers on a specific date in the future, as long as the advisers fulfill their vesting conditions. Think of RSAs as a promise from the company to pay the advisers with a certain number of shares (or their cash equivalent).

Side note: In the “shares vs. options” debate, the type of advisory share to go for depends on the company’s stage, its valuation, the advisor’s role and contribution, and tax considerations. In our experience, if a startup is super young, strapped for cash, and can’t yet be properly valued, RSAs are typically the option to go for. As the company matures and its valuation increases, stock options might become more attractive.

Understanding the vesting schedule for advisory shares 

As we mentioned, advisory shares come with a vesting schedule you and the adviser agreed upon. This schedule represents the conditions your advisors must meet to be able to convert their shares into stock options or RSAs.

This schedule can be based on time, achievement of specific milestones, or a combination of both. Shares typically vest monthly over a 1-2 year period.

*Cliff Period: Most vesting schedules include a so-called cliff period when no shares vest. This encourages advisors to commit to the startup for at least a certain period before receiving any equity.

Time-based vesting

In this case, advisors must stick with your company over a specified period to be able to claim their shares. 

For example, an advisor is granted 1,000 shares with a three-year vesting schedule and a one-year cliff. This means they must stay with your company for at least one year before any shares vest. After the cliff, shares typically vest monthly or quarterly in equal portions over the remaining vesting period. 

In this case, 25% of the shares (250 shares) would vest every year after the one-year cliff.

Milestone-based vesting

In this case, you set goals the adviser must achieve to be able to vest their shares. No cliff period is implied.

For example: You grant an advisor 1,000 shares, and the vesting of these shares is tied to achieving certain milestones:

  • 250 shares vest when your product is launched
  • 250 shares vest when the startup reaches a certain revenue/customer target
  • 250 shares vest when you land X number of partnerships, etc. 

Hybrid vesting

This type combines the elements of both time-based and performance-based vesting. Advisors may have a time-based component (e.g., a 1-year cliff) and performance-based components (e.g., additional shares vest upon achieving milestones).

For example: An advisor is granted 1,000 shares with a 1-year cliff. After the cliff, shares vest quarterly based on milestones: 250 shares vest upon reaching the first milestone, and an additional 250 shares vest when the second milestone is achieved. This structure ensures ongoing commitment and performance.

*Partial vesting: If an advisor leaves your startup before all shares vest, they only retain the vested portion; the rest remains with you.

Advisory shares vs. Equity vs. Regular shares: Key differences

Many early founders confuse these three terms; let’s see how they differ in all key aspects.

Advisory shares vs. Equity vs. Regular shares
Advisory shares vs. Equity vs. Regular shares

Advisory shares: Pros and cons for startups

Pros of advisory shares:

  • Access to expertise: Advisors bring serious know-how to the table, helping founders make savvy moves and tackle tough situations.
  • Networking boost: Advisors often roll with a pretty valuable crowd. They can introduce you to potential clients, partners, investors, and other useful contacts.
  • Budget-friendly: When cash is tight, advisory shares can save the day. You’re essentially saying, “Help us out, and we’ll share the pie when it’s baking.”
  • Alignment of interests: With some skin in the game (aka equity), advisors are more likely to be on the same page as you. They’ll be rooting for the home team.
  • Long-term partnership: Equity sweetens the deal, encouraging advisors to stick around for the long haul, which means ongoing support.

Cons of advisory shares:

  • Ownership dilution: Giving out equity means slicing up your ownership pie. More advisors can mean smaller slices for founders and early backers.
  • Complex equity structure: Managing equity for advisors, especially with multiple agreements, can turn your cap table into a labyrinth with extra paperwork.
  • Uncertain ROIs: There’s no guarantee that advisors will hit the mark with their contribution, so you might not see the big wins you hope for.
  • Administrative burden: Keeping track of vesting schedules, equity deals, and chats with advisors can be a real admin headache and lead to administrative overheads.

The equity question: How much should advisors get?

So, what is an equity stake for advisors? The amount of company’s equity granted to advisors may vary considerably depending on their experience, influence, and role. It also depends on how long the advisor and the company plan to work together.

In our experience, the startup advisor compensation never exceeded 5%, regardless of the factors above, ending up between 0.2% and 5%. Before deciding on where you should land on that spectrum, consider:

  • How hands-on you want the advisor to be
  • How much contribution you expect
  • Their level of expertise/experience and the magnitude of their name and network

On average, early-stage companies typically lean toward the higher end of this range. They require more involvement and assistance with a broad range of tasks, so the amount of equity for advisors tends to be loftier. More mature startups offer smaller percentages, as they tend to need a narrower advisory and less involvement. 

Also, the impact of the advisory on your top and bottom lines matters big time. For example, if an advisor gives you access to their contacts that can potentially convert into clients and directly boost your revenues, they’ll likely demand a bigger slice.

Remember: The advisory board compensation is always a matter of negotiation. The more aces you have up your sleeve, the more chances you have to negotiate favorable terms, and vice versa.

Types of advisors eligible for advisory shares

The short answer would be anyone with the needed expertise, experience, or connections can be a suitable equity advisor. Here are common types of equity advisors that work best for certain growth stages or needs:  

Early-Stage Advisors:

  • Role: Provide guidance on building a minimum viable product (MVP), fundraising strategies, and initial market entry.
  • Types: Serial entrepreneurs, angel investors, and VCs with experience in early-stage funding.

Product Development Advisors:

  • Role: Offer insights into product development, technology choices, and user experience.
  • Types: Technical experts, product managers, and individuals with experience in developing and launching products.

Market Entry and Growth Advisors:

  • Role: Assist in developing market entry strategies, expanding customer acquisition channels, and scaling sales.
  • Types: CMOs, VP sales, and business development professionals.

Financial Advisors:

  • Role: Provide financial forecasting, budgeting, and fundraising advice.
  • Types: CFOs, financial analysts, and individuals with expertise in financial management.

Industry-Specific Advisors:

  • Role: Offer insights into industry trends, regulatory considerations, and strategic partnerships.
  • Types: Professionals with deep industry knowledge and connections.

Scaling and Operations Advisors:

  • Role: Assist in scaling operations, optimizing processes, and building organizational capabilities.
  • Types: Operations managers, scaling experts, and individuals with experience in organizational growth.

Mergers and Acquisitions (M&A) Advisors:

  • Role: Guide the company through potential mergers, acquisitions, or partnerships, providing expertise in negotiations and deal structures.
  • Types: Investment bankers, M&A consultants, late-stage VCs.

How to choose and vet a startup adviser

As the rule of thumb, you want to be looking for a person that can help cover the gaps you can’t cover yourself. 

Start by defining your needs. Examine the areas where your company needs a boost and look for a person that can offer mentorship and help in those areas. Also, consider how much contribution and involvement you require, both time and result-wise.

If you pick your advisers well, it’s not uncommon for them to turn into the company’s first investors, participate in its future funding rounds, or join the company as its employees.

Here is what to keep in mind when picking an advisor:

  • Network and connections: If you need someone who can introduce you to potential investors, partners, customers, or industry figures, look for a person with a strong industry presence and valuable connections.  
  • Experience and expertise: If you’re looking for practical advice to help you establish or uplevel processes like hiring, GTM, sales, fundraising, etc., look for people who have walked the walk, preferably within your industry and stage.
  • Communication skills and cultural fit: Effective communication is key, so look for someone with whom you have an understanding and who shares or compliments your approach, work style, and values.
  • Track record of mentorship: While not a make-or-break point, it’s always better to look for someone who has experience in guiding others and converting their knowledge into practical advice.
  • Feedback & recommendations: People who match the criteria to be an advisor will most certainly have a presence on LinkedIn or the internet, with feedback left about them from those who worked with them. Do your due diligence and check what their former colleagues, partners, or clients say about their experience working with the person. 
  • Availability: An adviser might tick all the boxes, but it means nothing unless they can get involved with your venture at the capacity you need them to, so make sure the advisor can meet your expectations regarding their contribution.

Remember: The advisor-startup tandem is a relationship before all else. Pick your advisers as you would your partners. You must get along, work well together, and be on the same page about the big-picture stuff, or this will be a major waste of time on both ends.

How to find startup advisors

There are quite a few routes you can take to find an advisor:

Your network: If you have an opportunity to reach out to colleagues, friends, mentors, and industry connections for referrals, go for it. It’s easier to build trust, form a more personal relationship, and get the advisor on your side. 

Networking events and public speaking engagements: Industry-specific events, conferences, and meetups like TechCrunch Disrupt, Web Summit, Startup Grind, Demo Days, Pitch Nights, or TedX Talks are great for meeting experienced professionals who might be interested in advising startups.

Online platforms that connect startups with advisors: Websites like AngelList, AdvisoryCloud, or TheFunded can be useful for finding experienced advisors interested in working with startups.

Startup incubators/accelerators: Y Combinator, Techstars, and the like often have a network of experienced mentors and advisors who are willing to support startups.

Industry associations: Many industry associations, like the National Venture Capital Association (NVCA) and the American Marketing Association (AMA) offer mentorship or advisory programs for startups.

LinkedIn and X: On LinkedIn, you can search for groups like “Startup Founders Network” or industry-specific groups to expand your network. Twitter/X, especially through industry-specific hashtags and chats, can be a platform to engage with industry professionals and thought leaders.

Cold outreach: Identify experts or thought leaders in your field and send them personalized messages expressing your admiration for their work and explaining why their guidance would be invaluable for your startup.

University networks: Explore connections with universities or research institutions. For instance, Stanford University and its affiliated ecosystem have a wealth of entrepreneurial expertise.

Advisor matching programs: Some organizations and platforms like SCORE or MicroMentor offer programs that match founders with potential advisors based on their needs and expertise.

Provisions of a startup-advisor agreement 

After you’ve found your dream adviser or two, it’s time to start outlining the legal details of your future partnership. Engage your team in the process and think collectively about what works for your company in each area.

Here are the necessary provisions of a startup advisor agreement:

  1. Parties involved
  2. Scope of services
  3. Term of agreement: The duration and renewal terms 
  4. Compensation amount, form, and conversion terms
  5. Advisory shares vesting schedule
  6. Performance criteria tied to vesting
  7. Confidentiality clause
  8. Non-compete and non-solicit clauses
  9. Conflict of Interest Policy
  10. Termination conditions
  11. Intellectual Property 
  12. Performance Evaluation

Founder advisor standard agreement template

As promised, here’s an editable sample of the advisory agreement template prepared by a premium law firm and our legal associates, Icon Partners. This sample will come in handy for startups and business advisors to use as a reference point.

Get your free editable advisory agreement template
Free download

Used right, advisory shares can bring game changers to the table

Issuing advisory shares can be one of the best ways to attract the best-in-class experts and mentors and fill the gaps in your expertise or network without spending a penny. 

But for this to turn out this way, you must:

  • Clearly define your needs and requirements, as there is no one-size-fits-all person
  • Decide how much equity you’re willing to give, and don’t step over it
  • Compose a list of candidates that meet your requirements and are willing to deliver at the capacity you require
  • Do your due diligence
  • Make sure your and the advisor’s personalities, goals, and vision align
  • Negotiate 
  • Engage layers to draft an advisory agreement that considers all the areas that can potentially affect your company

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Anna

Content Writer

Hi there! I’m Anya, a Content Writer at Waveup. I’ve been working with startups in various industries for over 4 years, soaking up the knowledge and learning from their business strategies. Now, I collaborate with the best minds here at Waveup to pick up their expertise and share it with the readers.