Most startups in 2023 nabbed funding close to $25 million for new opportunity funds. A recent study by Carta showed that startups with advisory share agreements secured 25% more funding than those without. Sharing equity suddenly became a strategic investment fueled by mutual trust and shared ambition.
As many founders believe, building a tech startup is a high-wire act. You need seasoned guidance, but advisors come with a price tag beyond mere platitudes. So, the question begs: Do you share your precious equity for their wisdom or risk losing their support?
Like most things in the startup world, the answer isn’t black and white. It’s about forging a symbiotic pact where advisors become investors in your vision, not just holders of stock options. That’s where win-win advisory share agreements come in.
But crafting these agreements can be a minefield. How much equity do you give? For what? And how do you ensure everyone wins, not just dilutes?
This guide is your blueprint. We’ll cut through the legal jargon and show you how to:
- Value advisor expertise: Move beyond gut feelings and use data-driven frameworks for fair compensation.
- Craft agreements: Ditch the legalese and build transparency into every clause.
- Minimize dilution, maximize growth: Strike the perfect balance between rewarding advisors and protecting your future.
- Transform equity into partnership: Foster deeper relationships where advisors become co-pilots, not just passengers.
But first, let’s understand what advisory shares are.
What are Advisory Shares?
Advisory shares are more than just stock options. They’re a potent symbol of trust, a shared stake in the future, and a powerful tool to attract and retain the best advisors.
Simply put, advisory shares are equity compensation offered to advisors in exchange for their expertise, guidance, and network. Think of them as a strategic partnership pact, where you offer a slice of your future success instead of paying consultants an hourly fee. It’s a powerful tool, but wielding it wisely is critical.
Advisory shares often come with a vesting period, a timeframe during which the advisor needs to fulfil their role to fully “earn” the shares. This encourages a sustained relationship. The percentage of advisory shares granted is negotiable but typically ranges from 0.1% to 2% of the company’s equity. While advisors hold equity, their voting rights are often limited compared to traditional shareholders, maintaining control in the hands of the founding team.
Advisor shares vs. Normal equity: Understand the differences
The terms “advisory shares” and “normal equity” can be confusing, but some key differences exist to understand when building your startup dream team.
| Normal Equity | Advisor Shares |
|---|---|
| Normal Equity typically refers to common or preferred stock issued to investors, founders, and employees in exchange for their financial contribution or sweat equity. | Advisor shares are a specific type of equity compensation offered to advisors in exchange for their expertise, guidance, and network. |
| Grants ownership rights in the company, including voting rights on major decisions, dividends if declared, and potential financial gains upon exit (acquisition, IPO) | It may or may not include full ownership rights (voting, dividends). Often structured as Restricted Stock Awards (RSAs) or stock options with vesting periods |
| Generally, carry higher value and dilution potential because it directly impacts company ownership and control. | Primarily incentivizes long-term commitment and alignment with the company’s vision without diluting ownership as significantly as normal equity. |
| Most Suitable for Investors, founders, and employees | This is a more aligned approach for advisors, mentors, and consultants |
| Advisory Shares may have conditions triggering conversion to common shares, such as reaching specific milestones or events. | In Normal Equity, common equity remains as such without conversion conditions. |
Choosing between advisory shares and normal equity depends on your needs and goals. Consider factors like:
- Stage of your startup: Early-stage companies might be more cautious with dilution and prefer advisory shares.
- Advisor contribution: An advisor’s expertise and impact might justify normal equity.
- Advisor goals: Some advisors might prioritize voting rights and ownership, while others value long-term incentives and lower dilution.
How do Advisory Shares Work?
Understanding how advisory shares function is crucial for startups seeking valuable expertise while protecting their future. Let’s delve into the mechanics of this potent tool, step by step:
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Identifying Advisors:
Your first act is pinpointing individuals whose knowledge and experience directly address your venture’s needs. Think industry veterans, marketing gurus, or financial experts – seasoned allies with the keys to unlocking new horizons.
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Negotiating Terms:
This stage involves careful negotiations to determine the percentage of equity to offer (remember, dilution plays a part). Discuss the duration of the advisory relationship, performance expectations, and any specific conditions attached to their involvement.
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Granting Shares:
Once terms are agreed upon, it’s time to formally allocate a portion of your company’s equity to the advisor. These shares, either vesting gradually (RSAs) or offering a future purchase option (stock options), represent their stake in your future success.
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Vesting Period:
Vesting ensures a commitment from both parties. Advisors earn their full shareholding rights over time through consistent contribution or achieving set milestones. It incentivizes long-term commitment and aligns their goals with yours.
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Advisor Roles:
While advisors provide invaluable guidance and insights, they focus on strategic contribution, not day-to-day operations. See them as wise consultants, illuminating the path for your venture to navigate.
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Voting Rights:
Limited voting rights are often the norm for advisors. They hold a vested interest but not necessarily a direct say in every decision. Founders and core teams typically retain control over significant company directions.
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Conversion Conditions:
Depending on the agreement, specific milestones or events trigger the conversion of advisory shares into common shares. Reaching ambitious revenue targets or securing significant funding could catalyze advisors to claim their piece of the company’s success.
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Clear Documentation:
A formal advisory agreement is your safety net, outlining all the terms and conditions of the partnership. This includes details on share percentages, vesting schedules, expectations, and exit clauses to ensure clarity and avoid misunderstandings.
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Tax Implications:
The company and the advisor should consult with professionals to understand the tax implications of advisory shares. This ensures everyone involved is well-informed and prepared for the financial aspects of the arrangement.
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Termination Clauses
The advisory agreement may specify circumstances under which the advisory shares can be terminated. This could include scenarios such as the advisor not fulfilling their agreed-upon responsibilities or the natural conclusion of the advisory relationship.
How to Manage Advisory Shares?
You’ve wrangled brilliant advisors onboard, eager to reach your goals! Now, the question arises: how do you manage their advisory shares and ensure everyone navigates the journey smoothly?
Let’s untangle this web with some handy tools and actionable tips:
Crafting the Compass: Clear Agreements and Trust
- Foundational Framework: Ditch the confusion and embrace clarity with a Founders Institute FAST agreement. This widely used template lays out expectations, roles, and shareholding specifics, serving as a north star for all parties involved.
- Open Doors, Open Communication: Foster a culture of open communication. Utilize platforms like Cabal to track contributions, exchange feedback, and keep everyone in the loop. Remember, transparency builds trust and strengthens the partnership.
Keeping Track of the Trek: Performance and Progress
- Goals Tracking: Keep your advisors from wandering. Set clear performance expectations aligned with company objectives. Think milestones, KPIs, and regular feedback sessions to ensure everyone’s aligned towards the same mountaintop.
- Phased Vesting for Shared Skin: Consider phased vesting schedules to incentivize long-term commitment. As your startup scales new heights, so do its shareholdings, aligning interests and fostering a sense of shared ownership.
Mapping the Exit Paths: Transparency and Options
- No Surprises at the Summit: Define clear exit clauses for share purchase, redemption, or dilution during specific events. Being upfront about acquisition, IPO, or other scenarios avoids misunderstandings and protects both parties.
- Maintain Diversity of shares: Explore equity diversification platforms like Fairmint. They allow granting tokenized equity to advisors, contractors, or even influencers in exchange for their contributions. This flexibility creates a spectrum of potential rewards, tailoring incentives to each unique relationship.
Words of Caution
While the excitement of navigating the startup world is exhilarating, remember every venture needs a healthy dose of caution and preparation. Here are some key takeaways to consider:
- Equity Dilution: Consider how advisory shares and future fundraising dilute existing ownership. Balance attracting expertise with protecting your control.
- Misaligned Expectations: Clearly define roles and expectations with advisors. Unrealistic goals or misunderstandings can lead to friction.
- Tax Implications: Seek professional advice on the tax implications of advisory shares for your company and advisors. Unforeseen tax burdens can create tension.
- Over-reliance on Advisors: Advisors offer valuable guidance, but remember, the buck stops with you. Stay independent of their input.
Conclusion
The startup world thrives on audacity, and that often means embracing the unknown. Founders can’t chart every course or predict every action – they need a helping hand. Advisors fill those positions and help in crucial roles.
However, the partnership requires more than just shared ambition. It demands transparency, clear expectations, and a keen understanding of the instruments that bind them – like advisory shares.
Offering these golden tickets to future success is a calculated gamble for founders. They relinquish a piece of their pie, hoping the advisor’s expertise becomes the secret ingredient that makes it grow bigger for everyone. Yet, for advisors, accepting these shares demands introspection.
Beyond the practicalities, a more profound question begs to be explored: does the current model of advisory shares, with its focus on ownership and future riches, truly foster the ideal advisor-founder dynamic?
Can we imagine a model where collaboration, mutual growth, and shared impact become the driving force rather than the promise of a lucrative exit? Perhaps, by challenging our preconceptions about what motivates individuals and fuels innovation, we can unlock a new era of collaborative ventures where “we” genuinely take precedence over “me.”
Start3r, a platform built on the ideals of community and shared success, is already exploring these possibilities. While advisory shares offer a traditional way to reward expertise, Start3r envisions a future where collaboration, not just dividends, binds founders and advisors.
Find tools for seamless communication, investor matchmaking, and effortless equity management, all geared toward building a venture that soars together.
Sign up today!
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