What are advisory shares and who gets them?

What are advisory shares?

Advisory shares, also called advisor shares, are a type of equity that startups give to their advisors instead of paying them cash. Advisors often receive these shares as compensation for providing strategic advice, mentorship, and valuable industry connections. This form of payment allows startups to benefit from the expertise of experienced professionals without impacting their cash flow.

Who gets advisory shares?

Advisory shares are granted to individuals who can provide specialized knowledge or access to valuable networks that a young company might not otherwise reach. These advisors are often:

• Industry experts: Professionals with deep expertise in marketing, finance, technology, or operations.
• Seasoned entrepreneurs: Individuals who have previously launched or led successful companies, offering strategic insights on potential pitfalls and best practices.
• Investors with connections: Some angel investors or venture capitalists might act as advisors, helping the startup make connections or secure additional funding.

Equity vs. advisory shares

Equity, in broad terms, represents ownership in a company and is typically given to founders, employees, or investors. Advisory shares, however, are a specific type of equity issued to members of the advisory board. They don’t come with the same privileges as regular or common shares:

• No voting rights: Advisory shares don’t usually grant advisors the ability to vote on company matters.
• Restricted benefits: Advisors with advisory shares don’t receive dividends, nor do they have claims to company profits.
• Focus on guidance: Advisory shares reward advisors primarily for their knowledge and support rather than giving them an active role in the company’s governance.

Regular shares vs. advisory shares

Here’s a table comparing regular shares and advisory shares:

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This comparison highlights how advisory shares prioritize expertise and support over ownership and governance.

Who issues advisory shares?

Startups typically issue advisory shares, especially in the early stages, when cash is tight, and they need outside expertise. Founders use advisory shares to attract experienced professionals—like industry veterans, former founders, or investors—who bring essential skills and contacts.

These company advisors might assist in product development, scaling strategies, or even opening doors to investors.

Types of advisory shares

Advisory shares can be an attractive way to bring advisors on board with equity instead of cash. When a company issues advisory shares, they usually come in two main types: 

Restricted stock units (RSUs)

RSUs (also known as RSA) are equity options that companies often issue to advisors who provide services. With RSUs, the advisor doesn’t own the stock immediately.

Instead, the company promises to grant the advisor actual shares of stock once specific conditions are met. These conditions might be time-based (like staying with the company for a set period) or performance-based (such as meeting particular milestones).

Key features include: 

• Ownership delay: Advisors receive stock only after the vesting conditions are satisfied.
• Tax impact: Advisors are taxed on RSUs once the shares are vested, with the shares’ value taxed as ordinary income tax. This can sometimes be an advantage, as the advisor doesn’t owe taxes until they own the stock.
  
  Please consult with a tax professional for guidance. 

Stock options

Stock options are another way to provide advisors with equity. These options give advisors the right, but not the obligation, to buy a company’s equity shares at a predetermined price, known as the strike or exercise price.

In most cases, companies offer Non-Qualified Stock Options (NSOs) to individual advisors rather than Incentive Stock Options (ISOs), typically reserved for employees. Some features of NSOs are:

• Right to purchase: NSOs allow advisors to buy shares at a set price, often at a discount to their future value.
• Tax implications: Unlike RSUs, NSOs are subject to tax at the time of exercise. Advisors are taxed on the difference between the strike price and the market value when they exercise the option. When they later sell the shares, they may also owe capital gains tax on any further gains.
• Flexibility: Advisors can choose if and when to buy the shares, giving them control over their investment based on the company’s performance and financial goals.

Both RSUs and NSOs are subject to vesting, helping startups manage equity dilution while ensuring long-term commitment.

How advisory shares work

Advisory shares are equity compensation given to advisors in exchange for their expertise, guidance, and network. These shares work similar to employee stock options but are structured specifically for advisors. Let’s go a little deeper into how advisory shares work and the important elements you need to consider.

Agreements

Before granting advisory shares, you must have a term sheet and formal shareholders agreement. A well-drafted agreement clarifies expectations and protects your business.

• Startup advisor agreement: This document outlines the advisor's role and responsibilities and shares allocation details. It should include a clear scope of work, confidentiality clauses, intellectual property rights, and any specific milestones or objectives the advisor should meet.
• Founder/Advisor Standard Agreement (FAST): Created by the Founder Institute, FAST Agreements  provide a simple, standardized way to formalize advisory roles. They streamline the process of defining equity allocation, vesting schedules, and expectations, making it easier for startups to engage advisors without legal complexity. 

Without a well-defined agreement, misunderstandings can arise, potentially leading to legal conflicts or misaligned expectations.

Vesting

Vesting schedule or vesting period for advisory shares helps you make sure that advisors remain committed to your business over time. They control how and when advisors earn their shares, aligning their incentives with your company's long-term success.

• Time-based vesting: An advisor earns shares by staying with the company for a certain period. For instance, a four-year vesting schedule with a one-year cliff requires an advisor to serve at least one year before earning shares. After the first year, shares might vest monthly or quarterly.
• Milestone-based vesting: Here, advisors earn shares by achieving specific goals, such as helping the company secure funding or reach a certain revenue level. This schedule is less about time and more about results, motivating advisors to make a tangible impact.
• Hybrid vesting: Hybrid vesting combines time and milestones. Advisors must complete a certain period with the company and reach specific milestones to earn their shares. This approach guarantees both long-term commitment and meaningful contributions.

Equity dilution

Equity dilution is an important factor when granting advisory shares. Each time new shares are issued, the ownership percentage of existing stakeholders decreases. However, the expertise and connections that advisors bring can add significant value, which often outweighs the impact of dilution.

Performance milestones

Finally, consider setting performance milestones tied to your company’s growth to maximize the value of advisory shares. Linking shares to specific achievements makes sure that advisors stay focused on outcomes that drive your business forward.

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Whether helping you secure a major client or achieving a set revenue target, performance milestones create a structure that keeps advisors motivated and aligned with your goals.

Pros and cons of advisory shares

Advisory shares can be a smart way to bring expertise and industry connections into your company without requiring upfront cash compensation. However, advisory shares come with specific challenges that can affect both you and your business. Here’s a look at the pros and cons to help you decide if advisory shares are right for your company.

Pros

• Access to expertise and networks: Offering a stake in your company lets you bring in experts like marketing specialists, legal advisors, and tech consultants who can help drive your business forward.
• Aligned incentives: Since advisors benefit when the company succeeds, advisory shares naturally align their interests with yours.
• Cost-efficient compensation: Offering equity compensation instead of cash conserves capital while securing valuable expertise. This can be especially beneficial for early-stage startups that need every bit of cash for core operations.
• Flexibility and control: Advisors don’t typically have the same voting rights as major shareholders, which helps you maintain control over key decisions.

Cons

• Equity dilution: Issuing advisory shares increases your total share count, which dilutes existing shareholders’ equity. This can impact investor interest and may make future funding rounds more challenging.
• Complex valuation: An uncertain fair market value (FMV) can complicate negotiations and make assessing the true cost of advisory equity harder.
• Legal and tax implications: You’ll need to comply with securities regulations, and advisors will likely have to pay income tax on the shares, which adds administrative complexity.
• Confidentiality and conflicts of interest: Advisors often need access to confidential company information, which can raise confidentiality concerns, especially if they have ties to competitors.

How much equity should you set aside for advisory shares?

Setting aside equity for advisors can effectively attract expertise, but knowing how much to allocate can be tricky. So, here’s a breakdown to help you determine what’s right for your company:

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• Pre-funding stage: If you’re in the early stages, advisors who contribute limited support, such as attending monthly meetings, may be granted 0.25% to 0.5% equity. Advisors with highly valuable networks or specialized skills might deserve a higher percentage, especially if their connections or advice could lead to future customers.
• Post-seed funding: Once your startup secures its first round of fundraising, advisor shares might be diluted as new investors come in. An advisor who initially held 0.5% equity may find this reduced after the seed stage, often dropping to around 0.25% as additional financing rounds occur.
• Long-term considerations: Keep in mind that advisory shares are subject to dilution as your company grows. Even a small share, like 0.25%, could hold significant value if your startup’s valuation increases. Although a small amount of equity may not seem substantial early on, it can become valuable over time.

FAQs about advisory shares

What's the difference between advisory shares and regular shares?

Unlike regular shares, advisory shares are stock options offered to advisors for their guidance, representing actual ownership interests in a company. Advisors receive financial rewards or returns tied to company performance without regular shareholders' full ownership rights.

What is the disadvantage of advisory shares?

Advisory shares dilute the equity pool, which may affect future investor interest. They also introduce legal complexities and potential confidentiality risks and may give advisors some decision-making influence.

Do advisory shares dilute equity?

Yes, advisory shares dilute equity, especially if more shares are issued in future funding rounds. This means the advisor’s percentage ownership in the company can decrease over time.

While equity dilution is inevitable, the strategic value advisors bring often outweighs the decrease in ownership percentage.

How are advisory shares taxed?

Taxes are applicable on advisory shares, similar to regular income. Advisors pay income tax on the value of the shares they receive. This differs from capital gains tax, which generally applies to regular stock options.

How do advisors get paid on shares?

Advisors typically receive between 0.25% and 5% equity, depending on their contribution to the company’s growth. As funding rounds continue, their equity stake is often diluted, but even small percentages can become valuable if the company succeeds.

Wrap up

Advisory shares are a valuable way for startups to attract experienced professionals who can guide growth without the cash outlay. These shares offer a non-voting stake in the company and are often subject to a vesting schedule, tying advisors' rewards to the company’s long-term success.

For businesses looking for support in managing funds efficiently, Rho can help. With Rho's platform, you get streamlined access to business checking, treasury, and enterprise-grade spend management. Our automated tools for accounts payable, corporate cards, and expense tracking let you focus on growth while managing cash effectively.

If you want to control your company's finances, schedule time with a Rho finance expert.

Pia Mikhael is a guest contributor. The views expressed are theirs and do not necessarily reflect the views of Rho.

Rho is a fintech company, not a bank. Checking and card services provided by Webster Bank, N.A., member FDIC; savings account services provided by American Deposit Management, LLC, and its partner banks.

Note: This content is for informational purposes only. It doesn't necessarily reflect the views of Rho and should not be construed as legal, tax, benefits, financial, accounting, or other advice. If you need specific advice for your business, please consult with an expert, as rules and regulations change regularly.