Advisory Shares: How to Effectively Reward Startup Advisors While Preserving Equity

Advisory shares can be a smart way to reward advisors who bring valuable expertise to your startup. But questions like who should receive equity, how much they should get, and how to structure it often leave founders unsure where to start. Since every advisor relationship is unique, finding the right approach can be tricky.

In this article, we’ll break down the basics of advisory shares, how to decide on equity stakes, and tips for creating a clear and fair policy to get the most out of your advisors’ contributions.

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What are Advisory Shares?

Advisory shares are a form of equity given to advisors in return for their guidance and expertise. These shares can either complement or replace cash compensation, depending on the agreement.

Unlike stock options offered to employees, advisory shares often come with different terms, such as unique vesting schedules. They’re tailored to the advisory role and aren’t typically part of employee-focused equity plans, which are designed with different objectives in mind.

Learn more about Equity: Equity stake

Why Are Advisors Important for Tech Companies?

Advisors play a key role in supporting founders and startups. They bring an outside perspective to help navigate critical decisions and provide clarity when founders are juggling countless responsibilities.

The best advisors combine deep industry knowledge, an unbiased viewpoint, and valuable networks. Unlike mentors, who often offer informal guidance for free, advisors typically enter formal agreements—which is why compensation is such a big discussion point.

Many startups rely on advisors in some capacity, and as companies grow, they may even form advisory boards to bring in more expertise. However, no two advisor relationships are the same. Factors like their area of focus, the amount of time they dedicate, and the type of expertise they offer can all shape the relationship—and influence how they’re compensated.

Let’s explore how you can approach these decisions and structure advisor relationships effectively.

How Do Companies Issue Advisory Shares?

Setting up equity for advisors is different from doing so for employees, and the type of share scheme you choose plays a big role in this process.

Choosing the Right Share Scheme

In some regions, specific share schemes work better for advisors. For example, in the UK, growth shares are a popular option because advisors don’t need to be employees to hold them. They’re also more tax-efficient compared to unapproved stock option schemes, which can make them more attractive.

In Germany, the tax rules around equity can be complex. Many advisors use a separate entity to receive shares to avoid the high tax burden that comes with selling ESOP shares.

Alternatively, unapproved share schemes can be a simpler way to issue options without needing to agree on a valuation with tax authorities. However, these often come with a heavier tax load, which should be clearly explained to the advisor.

Keep Communication Clear

Whatever share scheme you choose, make sure to discuss the details with your advisor early on. Transparency about tax implications and how the equity is structured helps avoid confusion and ensures the advisor fully understands their compensation.

Pros and Cons of Advisory Shares

Advisory shares can be a smart move for your business, but they also come with some potential challenges. Let’s break down a few key benefits and drawbacks.

Pros

• Cost-Effective for Early-Stage Startups
  Many top advisors are willing to work for equity instead of cash, which can be a big win for startups that don’t have the budget for high cash compensation.
• Experienced with Equity Plans
  Unlike employees, advisors usually don’t need detailed explanations about how equity works. They’re often seasoned professionals who are already familiar with startup equity plans, saving you time and effort.

Cons

• Impact on Employee Equity Pool
  Allocating shares to advisors might reduce the equity available for employees. Founders often prioritize the employee stock option pool, so giving too much to advisors could limit what’s left for team members later on.
• Potential Conflicts of Interest
  Advisors often bring valuable experience, but some may have ties to competitors or investments in other companies. It’s important to evaluate these relationships carefully to avoid potential conflicts down the road.

Which Advisors Should Receive Advisory Shares?

Not all advisors need to be compensated with equity. Some might only work with your business briefly or prefer cash over shares. Still, having a clear structure for awarding advisory shares can help you make consistent and fair decisions.

At Pitchdrive, we suggest grouping advisor relationships into three categories:

• Lighter Touch Advisors
  These advisors provide occasional support that’s helpful but not critical to your company’s success. Their involvement is limited, and their input is usually less frequent.
• Strategic Advisors
  These advisors have a more regular engagement, such as monthly or bi-weekly check-ins. They might contribute through network introductions, recruitment help, or offering expertise in specific areas. Their input often adds significant value to your business operations.
• Core Advisors
  Core advisors are deeply involved in your business, dedicating 5-10% of their time to addressing high-stakes challenges. Their expertise often impacts critical areas, like advising the CEO or solving complex product or operational issues.

How Much Equity Should You Offer Advisors?

Once you’ve decided to offer equity to an advisor, the next big question is: how much? The answer depends on factors like your company’s stage and the advisor’s role.

Equity Allocations for Different Types of Advisors

At earlier stages, advisors often expect a larger equity stake. Startups at this point are riskier, and the right advice can have a huge impact on growth and direction.

Using the categories of lighter touch, strategic, and core advisors:

• Lighter Touch Advisors typically receive the smallest equity allocation since their involvement is limited.
• Strategic Advisors receive more equity due to their regular and impactful contributions, like leveraging their network or helping with recruitment.
• Core Advisors are deeply involved and often tackle critical issues, so their equity stake reflects their higher level of commitment and value.

Equity by Company Stage

For early-stage startups, benchmarks suggest that high-impact advisors can receive up to 0.8% of fully diluted share capital. This is comparable to the equity offered to very senior hires, showing how pivotal advisors can be.

Interestingly, these benchmarks have stayed consistent over the years, with studies like Orrick and the Founder Institute’s still holding relevance. This stability underscores the enduring value of structuring advisory shares thoughtfully.

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Ground Rules for Advisor Equity

Giving equity to an advisor is a big decision. Startup equity is valuable, and offering too much—or giving it to the wrong people—can create problems later. It’s essential to approach advisor equity thoughtfully to avoid overcompensating or diluting your equity unnecessarily.

Avoid Common Pitfalls

Some startups are tempted to recruit high-profile advisors to make their pitch deck look impressive, but this doesn’t always deliver real value to the business. It’s better to prioritize advisors who can genuinely contribute to your company’s growth.

Similarly, if an advisor’s input is only needed for a few months, consider engaging them as a consultant or contractor rather than offering long-term equity.

Test the Relationship

Not sure if an advisor is the right fit? Try setting up a trial period. This allows both sides to see how the collaboration works in practice before making a long-term commitment. It also gives you time to assess the real value the advisor can bring.

Vesting for Advisory Shares

Advisory shares should be subject to a vesting schedule, just like employee shares. This ensures that equity is tied to the advisor’s ongoing contribution. A typical advisory relationship lasts around two years, with shares vesting gradually over this period.

For example, if an advisor is granted 0.1% equity (10,000 shares), and the agreement is for 24 months, the shares could vest at a rate of 416 shares per month. This setup protects your company in case the advisor’s contributions don’t live up to expectations, as they only receive equity for the time they’ve actively supported the business.

Conclusion 

Advisory shares are a valuable tool to attract and retain the right advisors who can drive your startup’s growth and success. By carefully structuring equity, selecting advisors who bring critical, long-term value, and implementing tools like vesting schedules, you can reward contributions without compromising your equity pool. Equity is a precious resource, so it’s essential to think strategically about each advisory agreement. With the frameworks and tips outlined here, you can confidently create a structure that benefits your business while staying aligned with your long-term goals, ensuring your equity plan management remains strong and effective.

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Read more about: 

Finding Founder-Investor Fit: A Key to Pre-Seed Success 

Why Coaching is a Game-Changer for Your Startup Business

Term Sheet Tactics: How to Navigate Pre-Seed Startup Funding

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