Advisory shares: A founder’s guide

The right startup advisor can provide strategic insights, a network of contacts, and other valuable services for an early-stage company. But for startups that may not yet have significant cash flow, rewarding your advisors often comes down to non-cash compensation and benefits. Equity-based compensation for advisors is generally referred to as advisory shares or advisor shares.

What are advisory shares?

Advisory shares are a form of equity compensation given to a company's advisors in exchange for their expertise, strategic guidance, or industry connections. Granting advisory shares is a common strategy for early-stage companies to bring high-level guidance to the company without draining their bank account. If a startup doesn’t have the cash flow to pay advisor fees upfront, it can offer advisory shares in the form of stock options or restricted stock awards (RSAs), which represent a portion of the company’s equity.

It's a common misconception that advisory shares are a special class of stock. In reality, they are typically the same common stock or stock options that you might grant to early employees. The type of equity given to advisors can vary from company to company. The term simply refers to equity granted for advisory services, making it a powerful tool to compensate seasoned professionals who can help you handle the challenges of building a business.

Why grant advisory shares?

There are multiple benefits to granting advisory shares. Being able to offer non-cash compensation is useful for cash-strapped companies, and some advisors actually prefer to receive equity because of the potential upside. Company stock can increase in value as your business grows, whereas cash is typically fixed.

Deciding to bring on an advisor is a big step, and compensating them with equity can boost your startup’s trajectory. It’s a strategic move that can lead to significant future returns. When you're building a company from the ground up, the right advice at the right time can make all the difference, and advisory shares help you get that advice in the door.

Offering equity to attract high-caliber advisors is a common strategy within the startup world. The practice is so standardized that recent startup compensation data includes benchmarks for median advisor equity at pre-seed, seed, and Series A companies, making it a quantifiable recruitment tactic. As of H1 2024, the median percentage of fully diluted shares granted to an advisor were:

• Pre-seed: 0.21%

• Seed: 0.12%

• Series A: 0.05%

Here are the main reasons founders grant advisory shares:

• Conserve cash: For an early-stage startup, every dollar counts. Offering equity allows you to preserve your cash runway for critical needs like product development, marketing, or hiring your first employees.

• Align interests: When an advisor has an ownership stake, their success is tied to yours. As research from Harvard Business Review notes, this is critical to align incentives and attract the best human capital, creating a powerful motivation for them to provide their best advice and open up their networks.

• Attract top talent: You might not be able to afford the six-figure salary of a seasoned executive, but an offer of equity in the business can attract high-caliber advisors. These are often people with deep industry experience who are excited by your vision and want to be part of the journey.

• Reward contributors: By offering shares tied to a vesting schedule, you ensure that advisors have “skin in the game” and are motivated to stick around for the long haul. This not only builds loyalty, but also keeps their focus aligned with the company’s sustained growth and long-term success.

However, it’s important to be aware of the risks associated with issuing advisory shares. Dilution, overcompensation, and conflicts of interest are all problems to look out for and approach thoughtfully.

→ Learn more about creating an advisory board.

What types of equity can you grant advisors?

The two most common forms of advisory shares are restricted stock awards and stock options.The difference between RSAs and options is largely a legal distinction. RSAs are shares issued upfront; options are the right to buy shares in the future at a set price.

Choosing the right type of equity depends on your company's stage and the advisor's role. Each has its own implications for ownership and taxes, so understanding the difference is key to making the right choice for your company.

Here’s a simple breakdown of the two main types of advisory shares.

→ Learn more about restricted stock vs. stock options.

Restricted stock awards (RSA)

An RSA is a grant of common stock that is subject to vesting. This is a popular approach for very early-stage companies, often before the first funding round when the fair market value (FMV) of the stock is still very low. This makes it an attractive option for both the company and the advisor.

With an RSA, the advisor owns the shares from the day they are granted and any purchase requirements are satisfied. However, the "restricted" part means the company retains the right to repurchase any unvested shares if the advisory relationship ends prematurely. This protects the company and ensures the advisor is committed for the long haul.

Some advisors prefer receiving RSAs over stock options because RSAs can be structured to require a lower cash outlay: If an advisor doesn’t have the cash to exercise stock options at the company’s FMV, the company can instead grant an RSA for their services, and the advisor will just owe ordinary income taxes on the value of the shares.

Because advisors generally receive equity earlier in a company’s lifecycle, it’s rare for them to receive another type of stock: restricted stock units (RSU).

Stock options

Stock options give an advisor the right to purchase a set number of shares at a predetermined price, known as the strike price, at some point in the future, and some plans may even allow for an early exercise of stock options. This price is set on the grant date and doesn't change, so if the company’s value increases, the advisor can buy the stock at a discount.

Advisors receive non-qualified stock options (NSO), not incentive stock options (ISO), which are reserved for employees. Understanding the different types of stock options is important. The key difference lies in the tax treatment. With NSO, taxes are typically due when the options are exercised (ordinary income tax on the difference between the strike price and the FMV at time of exercise) and again when the shares are eventually sold (capital gains tax on any additional gain).

→ Learn more about stock option taxes.

How to structure an advisory share grant

Issuing equity to your advisors works like any other type of equity issuance. Depending on your company, you might be able to skip some of the steps outlined below if you’ve already issued shares to employees or other service providers.

How much equity should you give an advisor?

This is one of the most common questions founders ask, and while there's no magic number, there are established market standards. The amount of equity an advisor receives typically depends on their experience, the potential value of their contribution, and your company's stage of growth. Research even shows that some people are more willing to sacrifice cash compensation for a higher number of shares, even if the total value is the same, which is an important dynamic to be aware of during negotiations.

Carta’s compensation data provides real insight into what founders are offering their advisors. Here are the most common arrangements we saw for advisor shares issued in the first half of 2024 for pre-seed companies:

• The median advisor equity grant was 0.21% of company shares (down from .25% in 2021 through 2023).

• Only 10% of pre-seed advisors received 1% or more equity.

Determining how many shares to issue your advisors is a personal choice. Founders looking for more information or guidance should talk to their lawyers.

How to create an advisor agreement

A formal, written advisor agreement is essential. It protects both you and the advisor by setting clear expectations from day one. Think of it as the rulebook for your relationship, ensuring everyone is on the same page about their roles and compensation.

A strong startup advisor agreement should include:

• The advisor’s domain of expertise

• The advisor’s specific role and responsibilities

• The expected time commitment

• The exact number of shares or options being granted

• The vesting schedule, including any cliff period

• Confidentiality and intellectual property agreement clauses

Standardized templates, like the Founder/Advisor Standard Template (FAST) agreement, can be a great starting point because they simplify complex processes. The startup world has shown a clear preference for these kinds of documents.

However, you should always have your law firm review any agreement before it's signed to make sure it fits your company's specific needs. In addition, you will need to follow proper issuance processes for the grant of the advisor shares, including formally documenting board approval of the grant.

Download the advisory agreement template

We asked the team at Wilson Sonsini, a premier global law firm, to put together a sample agreement for founders and business advisors to use as a model.

This advisor agreement sample has been prepared by Wilson Sonsini for informational purposes only. 

How to structure vesting for advisors

Vesting schedules for advisors are often different from those for employees and last for the duration of the working relationship. An advisor's most significant contributions may come early in the relationship, so their vesting schedule typically reflects that. It's common to see shorter vesting periods for advisors.

“Vesting doesn’t make sense for advisors the same way it does for employees” says Amit Bhatti, a lawyer and Principal at 500 Global. That’s because companies change quickly and the advisors you need at the seed stage will likely be different from the ones you want at Series B funding round and beyond.

Advisory share agreements often have a two-year schedule, vesting monthly, with no cliff. Most companies avoid a four-year vesting schedule because most advisors are going to deliver most of their value up front. You can always re-visit the relationship after two years to see if you want to keep going forward.

Some advisory share agreements have a cliff of three months, which gives the parties time to sort out whether the relationship will deliver value and work out. Many advisors also negotiate single-trigger acceleration of the vesting schedule, which means they’re entitled to all their shares if a specific event occurs. This event could be the sale of the company, or the company’s termination of the working relationship.

How to manage advisory shares

Dilution, overcompensation, and conflicts of interest are all problems to look out for and approach thoughtfully when dealing with advisory shares and managing your company’s equity.

Aligning incentives with milestones

One way to get value from an advisory relationship is to tie an equity grant to specific, measurable outcomes, a practice known as milestone-based vesting. While time-based vesting is standard, adding performance conditions is a popular strategy for aligning incentives, especially for senior roles.

An advisor is providing a service to your startup, similar to an employee, so you should regularly assess your advisor's contributions to determine if they are meeting agreed-upon goals within your advisory agreement.

Examples of milestones could include:

• Assisting in the close of a priced round for seed fundraising

• Facilitating three strategic partnership introductions

• Helping to recruit a key executive

Managing dilution and your cap table

Review your cap table before issuing any new ownership and weigh the need for new advisors with the potential impact on your cap table.Every time you grant equity, you dilute the ownership of existing shareholders, which impacts your fully diluted shares. While some equity dilution is a necessary part of growing a company, it's something you need to manage carefully, as it can affect payouts alongside terms like liquidation preferences.

Using a platform like Carta for cap table management provides a single source of truth for your company's ownership. It allows you to model dilution scenarios, issue equity electronically, and maintain a clean, investor-ready record with real-time stock-based compensation reporting.

Understanding tax implications

Advisory shares can carry tax consequences for both parties, depending on the type of equity. As a founder, it's your responsibility to be aware of these, but you should never give tax advice to your advisors or employees. This can create legal risks for you and your company.

As Carl Olson, Senior Director of Finance and Administration at Luminary Cloud, shares, "I couldn’t answer a lot of the questions I was getting because I’m not legally allowed to give tax advice." This left his employees without the guidance they needed to make informed decisions about their equity.

It's important to understand the tax treatment of the type of shares or stock awards you choose to grant. Learn more about capital gains taxes or reach out to an expert at Carta.

Conflicts of interest

Conflicts can arise if you’re issuing equity to advisors who are involved with competing companies. There’s also the potential for an advisor’s interests to diverge from those of the company's founders or other investors. Establish clear guidelines and transparency about the advisor's role and expectations to mitigate these risks.

How to talk to an advisor about equity

Before promising equity, it’s worth asking a potential advisor if they would invest in your company instead of taking advisory shares. Investing directly gives them a stronger motivation to deliver value because their own money is on the line. It sends a valuable signal to future investors, as well.

Bhatti says it only makes sense to give equity “if the founder feels like they’re going to be demanding on somebody’s time.” Experienced advisors might have a framework they’ve used before: Once it comes time to talk compensation, they may offer a structure they’re familiar with. It’s up to you to determine if it makes sense for your company. If it doesn’t, work with your lawyer and the advisor to figure out an arrangement that works.

Issue advisory shares the right way

Bringing on advisors is a powerful way to accelerate your company's growth, but it's just one piece of the equity puzzle. Managing your company's ownership professionally from day one is foundational to building a successful business that is attractive to investors. It builds trust with investors, employees, and advisors alike, and providing them with professional tax guidance is a key part of that process.

Speak to an expert to learn more.

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Frequently asked questions about advisory shares

What is the difference between advisory shares and a stake in the company?

An advisory share grant gives an advisor an ownership stake in the company. However, this stake represents a much smaller percentage of ownership than that of a founder's initial allocation of founder shares or a major investor.

Can an advisor sell their advisory shares?

For a private company, an advisor can usually only sell their shares during a company-approved liquidity event, such as a secondary transaction, an acquisition, or an initial public offering (IPO). Any sale is also subject to transfer restrictions outlined in the company's legal documents.

How do advisory shares differ from employee stock options?

Advisory share grants are typically smaller, have faster vesting, are issued to non-employees, and follow different legal and tax rules compared to employee stock options. Both help attract and incentivize key contributors, but serve different roles in the company’s growth.

When should I offer advisory shares?

Offer advisory shares after you and the advisor clearly define their role, expected contributions, and time commitment, and once the value of their ongoing involvement is evident. Only formalize equity grants when your company is properly incorporated and has the legal structure to issue equity, using a written advisory agreement to set terms and protect your interests, and make sure grants are properly issued including with formal board approval.

Are advisory shares part of the option pool?

Yes, advisory shares are usually granted from the company’s option pool, just like employee stock options.