What are Advisory Shares?

Advisory shares are a form of equity compensation granted to company advisors in exchange for their expertise, strategic guidance, industry knowledge, or professional connections. They are commonly used by startups to attract experienced advisors without relying entirely on cash compensation. Advisory shares are seen most at startup companies in their initial stages because there’s a lack of cash flow, but there is an ability to utilize equity to recruit experienced operators or industry veterans without putting pressure on finances.

The advisory equity is awarded to persons who can provide expertise, strategic direction, or professional networks to the company without becoming a part of it as an employee. An advisor can contribute their time for several hours each month to help with the strategy, make introductions, or provide any expert advice. The rights that the advisor gets through this equity depend on the kind of equity offered.

Working of Advisory Shares

• Equity range: These shares generally range from 0.1% to 1.0% of equity of the company, based on how much the advisor would be involved in advising and the stage of the business. The more experienced person in the industry who has to make regular introductions would demand a higher percentage; the less involved person would get the lower one.
• Vesting period: The vesting period of an advisory stock is typically shorter compared to that of employee stock, usually 1-2 years depending on the contract. Vesting could be done every month, either with or without a cliff, or upon the achievement of certain milestones. In the event the advisor is terminated early, the unvested amount becomes forfeited.
• Advisor share pools: Some startups have an advisory stock pool that is typically capped at 5% of the equity of the business, depending on the startup’s need for advisors now and in the future. This stock pool can be shared by several advisors.
• Advisory share benchmarks: There are several founders who refer to the FAST agreement (Founder/Advisor Standard Template) to know about allocation.

Are Advisory Shares Taxable?

The tax implications of advisory shares will depend upon the nature of the shares provided, the terms of the contract, when the shares were provided, and other tax provisions that apply. 

Both parties in the advisory arrangement should have an understanding of the tax implications involved before entering into the contract. The best course of action would be to contact a tax professional to determine the tax implications involved.

What is the Effect of Advisory Shares on Dilution?

The issue of advisory shares may lead to a dilution of ownership of the shareholders, as the advisor will be getting an equity position in the company. The founders need to take into account the equity grant and what the advisor brings to the table while making their decisions.

Valuation of Advisory Shares

The value of advisory shares is based on variables including the level of the startup, its valuation, experience of the adviser, expected amount of time they will spend with the startup, industry knowledge, business connections, among others. The startup should look at the value the adviser can add to the business when granting shares.

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