Advisory Shares: How to Use Them in Your Startup
Have you been thinking about how to incentivize your advisors and mentors beyond just equity? Advisory shares could be an option worth exploring for your startup. As a founder, you know how critical good advisors and mentors are to the success of an early-stage company. Advisory shares allow you to grant advisors equity in your company in exchange for their guidance and expertise to help your startup grow. Unlike typical equity shares, advisory shares usually come with additional provisions to align incentives, often vesting over time based on continued service. While advisory shares are a bit more complex than a standard equity grant, they can be well worth it to attract and retain high-quality advisors to your team. If you've been looking for creative ways to compensate your advisors beyond cash or equity alone, advisory shares could provide the solution you need.
What Are Advisory Shares?
So you've got a new startup, and you want to issue advisory shares. Smart move. Advisory shares are a great way to compensate mentors, advisors, and other key partners without giving up too much equity.
Advisory shares give the holder certain rights in your company, like the ability to provide input, but without the full privileges of common stock. They don't come with voting rights or the potential for major financial gain that regular shares have.
You grant advisory shares through an advisory agreement that spells out the advisor's role and responsibilities. It should also specify things like how long the shares last and what happens to them if the advisor's role changes or ends. The key is being very clear upfront about what you and your advisor both expect.
Advisory shares are a win-win. They allow you to gain valuable insight and guidance without relinquishing control or ownership of your startup. And for the advisors, while the financial upside is limited, advisory shares demonstrate your commitment to their involvement and the potential for a longer-term relationship.
If used well, advisory shares can help establish key partnerships, open doors, and allow you to leverage expertise you may not have access to otherwise. The small amount of equity you grant is often well worth the benefits. Just be sure to choose your advisors wisely - their input and connections could be essential to your startup's success!
Why Startups Use Advisory Shares
As a startup, advisory shares are an attractive option to consider for several reasons.
Advisory shares allow you to tap into the knowledge and experience of experts in your industry without a huge upfront cost. These advisors can provide guidance on key decisions, make introductions to strategic partners, and help you avoid common mistakes. Their expertise and connections can be invaluable as you're getting your business off the ground.
Giving advisors equity, even a small amount, aligns their incentives with the success of your company. They have a stake in helping your startup thrive, so they're motivated to provide the best advice and support possible. Equity also gives them "skin in the game" and a sense of ownership in your vision.
As a startup, you need to be very careful with how you allocate your resources. Advisory shares are a way to utilize top talent without draining your budget. You can offer equity in lieu of, or in addition to, cash compensation. The advisors benefit if the value of the shares increases over time with the growth of your company.
Advisory shares are a strategic way for startups to gain valuable guidance and connections without breaking the bank. When used properly, they can help set your startup up for success and build a support network of experts invested in seeing you succeed. For cash-strapped startups, advisory shares may make the difference between struggling alone and having the mentorship needed to overcome obstacles.
What are the types of advisory shares
Advisory shares come in a few main flavors:
- Common Stock: Giving advisors common stock means they get equity and ownership in your startup. They can vote on key decisions and share in dividends and profits. The risk is if they leave, they keep their shares. Use for long-term advisors you trust.
- Preferred Stock: Preferred shares provide equity without voting rights or control. Investors get first dibs on dividends and payouts in a liquidation event. Preferred shares can have a fixed value that converts to common stock in an IPO. Good for advisors who want equity but not control.
- Options: Stock options give advisors the right to buy shares at a fixed price in the future. They only benefit if the share price goes up. Options usually vest over time to keep advisors engaged. Options are a popular way to compensate advisors without giving up too much equity.
- Revenue or Profit Share: Instead of equity, offer advisors a percentage of revenue, profits or royalties. This aligns their compensation with the success and growth of your business. The risk is if your startup struggles, their pay may be low. Consider caps or limits on the total compensation.
- Cash Compensation: Paying advisors in cash is simple but can be expensive for a startup. Cash may attract short-term advisors less invested in your success. However, cash is king for advisors who don’t want the risk of equity. Offer cash along with options or shares for the best of both worlds.
The right advisory share type depends on your startup's needs and values, and what will motivate your advisors to provide maximum benefit. A balanced approach with a mix of cash, equity and options may be your best bet to set your startup up for success.
Who gets advisory shares
Advisory shares are often given to key advisors who provide valuable guidance to startups. These advisors are usually experts in a particular field or industry that is relevant to your business. By giving them a stake in your company through advisory shares, you align their interests with your success and ensure their continued support.
Some people commonly given advisory shares include:
- Industry experts: Those with specialized knowledge in your target market or sector. They can provide strategic advice and connections.
- Former executives: Experienced leaders who have built and scaled companies before. They offer mentorship and insight into key decisions.
- Connectors: Well-networked individuals who can introduce you to influential people. While their advice may be broad, their connections are extremely useful.
-Board members: Outside directors who oversee major company matters. Advisory shares help compensate them for their time while giving them motivation to actively support your growth.
-Mentors: Those with whom you have a close working relationship. They thoroughly understand your business and vision, providing tailored guidance and feedback along the way. Awarding them advisory shares shows your appreciation for their support.
The key is to be highly selective in choosing who receives advisory shares. Look for individuals genuinely passionate about your success and able to meaningfully contribute to key decisions. While their shares may be small, even 0.5-2% equity can be highly motivating. The rewards of giving the right people a stake in your company will far outweigh the costs.
How do advisory shares work
Advisory shares give advisors equity in a startup without immediately diluting common shareholders. As an advisor, you’ll receive shares that vest over time as you provide value to the company.
For startups, advisory shares are a way to attract and retain high-quality advisors. You grant advisors shares that vest gradually, so they are incentivized to stick around and provide useful advice and connections. As their shares vest, advisors become more invested in the company's success.
To implement advisory shares:
-Determine how much equity you want to allocate to advisors. This could be 0.25-2% of total shares, depending on the role and value the advisor provides.
-Establish a vesting schedule, like 25% of shares vesting after 6-12 months, then monthly thereafter. Vesting motivates advisors and ensures they earn their equity over time.
-Outline expectations and key objectives for your advisors. Be clear on what you need from them to consider their shares vested. This could include attending key meetings, making introductions to potential partners or investors, reviewing business plans, etc.
-Formalize the advisory relationship with a contract. The agreement should detail the advisor’s role, vesting schedule, objectives, and any confidentiality or non-compete clauses.
-Consider performance-based vesting. You can specify that a portion of shares will vest only if key milestones are met, e.g. raising funding, partnerships, revenue goals. This further aligns the advisor’s interests with the startup’s key priorities.
Advisory shares are a strategic way for startups to bring on and motivate high-quality advisors. By establishing a clear vesting schedule and performance objectives, startups can make sure they're getting the advice and connections they need to succeed. Founders, does your startup issue advisory shares? What have been your experiences?
How to issue advisory shares
Issuing advisory shares is a great way to reward key advisors and mentors in your startup without giving up ownership or control. Advisory shares provide equity that is non-voting, so advisors have a stake in your success but no say in business decisions.
To issue advisory shares:
- Determine how much equity you want to offer each advisor. This is usually 0.1-3% for early-stage startups. Consider their experience, contributions, and role.
- Create an advisory share agreement for each advisor. This details the amount of equity, vesting schedule (often 1-4 years), and any responsibilities or commitments required of the advisor. Get legal advice to ensure it is fair and comprehensive.
- Issue the shares and complete necessary paperwork. Follow the process required in your state for issuing new shares. Advisory shares should be designated as "non-voting" to avoid complicating future financing rounds.
- Put an advisory board in place (optional). For multiple advisors, forming an official advisory board helps define their role and creates a structured way to provide guidance. Meet periodically to get input and updates.
- Keep advisors engaged. While advisory shares come with no concrete obligations, maintaining a good relationship with your advisors is mutually beneficial. Provide regular updates on your progress and ask for their guidance on key issues. Consider offering additional equity or compensation over time as your startup grows.
Using advisory shares allows you to surround yourself with a strong support network of experienced mentors to help guide your new venture without sacrificing control or ownership. Define clear expectations upfront and foster ongoing communication to build a collaborative relationship with your new advisors. With the right team behind you, your startup will be poised for success!
How much of the company's total equity should you give to advisors?
When determining how much equity to offer your advisors, keep in mind that advisory shares are meant as compensation for the value they provide, not an outright gift. As a general rule of thumb, plan to offer advisors between 0.25% to 2% of your total shares, depending on the role and level of involvement.
- An industry expert who attends quarterly advisory board meetings may warrant 0.5-1% equity.
- A mentor who will meet with you regularly to provide strategic guidance could earn 1-1.5% equity.
- A high-level advisor, like a former CEO, taking on a significant advisory role may deserve 1.5-2% equity.
The key is to stay in the single digits. Giving away too much equity too early can dilute the shares of founders and employees. Keep in mind that as your company grows, the value of shares will increase, so the percentage may be small but still provide good incentive.
Equity should be offered in the form of stock options with a vesting schedule, typically over 2-4 years. This helps ensure advisors will provide value over the long run. And of course, formalize all equity and advisory agreements in writing to avoid potential issues down the road.
By following these general guidelines, you can put together an attractive advisory share offer that compensates your advisors fairly without giving away too much of your precious equity. With the right advisors by your side, providing guidance and connections, the value they add to your startup can far exceed the equity offered.
So there you have it, the basics of advisory shares and how they can benefit your startup. While they may seem complicated, advisory shares are really just a tool to help you build a great advisory board and reward those key mentors and experts who will help guide your business to success. If used properly with the right advisors, advisory shares are a win-win - your advisors get equity for their contributions, and you get access to expertise and networks that can fuel your growth. As with any equity program, make sure you structure the details carefully based on your specific needs and situation. But don't be afraid to leverage advisory shares - they could be one of the smartest moves you make as an early-stage founder. Keep learning, keep growing, and good luck building your advisory dream team!