What Are Startup Advisory Shares? A Complete Guide

Benjamin Debonneville
Founder & CEO
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Have you heard of advisory shares? Startups use them to reward experts when cash is tight. It's like saying, "Help us grow, and you'll own a piece of our success."

For experts, it's a vote of confidence in a startup's future. For founders, it’s a way to get top advice without breaking the bank. Sounds great, right?

But, there are things to watch out for. Giving away too much? Conflicts? They're real concerns. So, how do they work, and are they right for your startup?

Here is our complete guide to help you figure it all out:

What are Advisory Shares?

So, what exactly are advisory shares? Think of them as a special "thank you" from startups to experts. Instead of cash, they give these experts a tiny slice of their company. Why? Because startups might not have lots of money early on, but they do have big dreams and potential.

These experts, often with big business backgrounds, aren’t there for legal or tax advice. Nope. They’re there for their golden advice on strategy and their valuable connections.

In simple terms: they help the startup grow, and in return, they get a piece of the pie. It's a win-win! They believe in the startup's future and bet on its success. Cool, right? Now, let’s dig deeper into how this all works.

Types of Advisory Shares

When companies want to thank their advisors, they sometimes give them a piece of the company. They do this in two main ways:

  • Here's some company stock for you now! – This is like giving them a slice of a pie that they can eat later. It's called Restricted Stock Units (RSUs). They get this slice once they’ve stuck around for a while or achieved some goals. When they do, they might need to pay taxes on it, kind of like buying a gift for a friend and getting a bill later.
  • You can buy some company stock later, at today’s price! – This is like giving them a coupon to buy a slice of pie in the future but at today's price. It's called Stock Options. It's great if the company grows and the pie slice gets more expensive because they still get it cheap!

Why Startups Grant Adivosory Shares and Who Get Them?

Startups often give out "advisory shares" as a savvy move. Why? Think of it as bartering. Instead of paying cash for expert advice, startups offer a tiny piece of their company.

It's a win-win: startups get top-notch advice without spending money, and advisors have a reason to genuinely care about the startup's success since they own a slice of the pie.

Who are these advisors? They're industry pros – from former founders to experts in fields like marketing or tech. Their experience can be a game-changer for young companies, helping them dodge pitfalls and grow faster.

Often, depending on their input and the company's stage, they might get anywhere from 0.25% to 1% of the company. It's all about fostering growth without breaking the bank.

How Do Advisory Shares Work?

Advisory shares are a smart way for startups to tap into expert knowledge. By offering these shares, startups can gain insights and mentorship from seasoned professionals.

Here's how it typically works:

  • Options, Not Shares: Advisors usually receive options to buy shares, not the actual shares. This approach helps in managing potential taxes for the startup.
  • No Power, Just Incentive: Advisory shares don’t offer perks like voting rights or dividends. They're just there to motivate and incentivize.
  • Vesting Schedules: Advisors don’t get all their shares immediately. Instead, they receive them over time through what’s called a vesting schedule.
  • Cliff Periods: Advisors might wait for a specific period, like three months before any shares become theirs. This ensures both sides are a good fit.
  • Equity Negotiations: The amount of equity given is negotiated between startups and advisors, ensuring a fair deal for their expertise.
  • Advisor Agreements: This legal document makes sure all terms, conditions, roles, and responsibilities are clearly defined, keeping everything clear and above board.

Advisory Shares vs Regular Shares: Key Differences

When we talk about company shares, two types often pop up: regular (or equity) shares and advisory shares. Each holds its weight and has its unique charm.

Let's understand the basic differences between them from the startups' point of view:

Differences Between Advisory and Equity Shares:

  • Who Gets Them: While anyone can grab equity shares, advisory shares are like exclusive tickets only for the wise guides of the business, the advisors.
  • Purchase vs. Reward: Equity shares are up for grabs – you can buy them. Advisory shares, however, are like a heartfelt gift from companies to their advisors for their invaluable insights.
  • Ownership Rights: Holding equity shares makes you a part-owner of the company. Advisory shares? Not quite. They don't confer ownership but recognize the advisor's contribution.
  • Voting Rights and Decision-Making: Equity shareholders often have a voice in company decisions. Advisory shareholders? They're the wise owls offering advice but don't usually get to vote.
  • Dividend Entitlements: With equity shares, you might get a slice of the profit pie – dividends. Advisory shares don't usually come with such sweet treats.
  • Purpose and Function: Equity shares are all about ownership and potential dividends. Advisory shares? They’re about valuing and thanking the company's guiding stars – the advisors.
  • Transferability and Sales Restrictions: You can usually sell equity shares freely. Advisory shares, on the other hand, often come with strings attached, like not being able to sell them right away.
  • Legal and Regulatory Considerations: Equity shares come with a whole rulebook of regulations. Advisory shares dance to a different tune, with their own set of legal considerations and nuances.

In short, think of equity shares as your general festival tickets and advisory shares as those backstage passes. Both are awesome but with different vibes and perks!

Advisory Shares: Pros and Cons

Advisory shares are like a double-edged sword – while they come with heaps of benefits, there’s also a flip side. Knowing the pros and cons helps startups wield this weapon wisely!

Here are the basic and important advantages and drawbacks of advisory shares for startups:

Advantages of Advisory Shares:

  • Attracts Expertise: Startups can woo top-notch experts by offering these shares. Their advice during the teething phase can be a game-changer.
  • Protects Confidentiality: Advisors get a sneak peek into company secrets. With these shares on the table, it's easier to get them to zip it with confidentiality agreements.
  • Incentive Alignment: Since advisors' paydays are tied to the company’s success, they’re more driven. Their wins align with the business's wins.
  • Professionally Managed Portfolio: For investors, it's like having a dream team handle their investments, aiming to strike the right balance between risk and returns.
  • Diversification: These shares bring in varied experts, offering different perspectives. It's like having multiple aces up your sleeve.

Drawbacks of Advisory Shares:

  • Dilution Dilemma: Issuing more shares means everyone else’s slice of the pie shrinks. This can be a turn-off for potential investors down the road.
  • Complexity: Brace yourself for a paperwork storm. Setting it all up eats into time and resources.
  • Loss of Control: More advisors with shares equals more voices in decision-making. This can sometimes feel like too many chefs in the kitchen.
  • Value Hiccups: Today's small equity giveaway can become tomorrow’s fortune. What feels like peanuts now might be gold later.
  • Privacy Concerns: Sharing company secrets with advisors? Tread carefully. They might mingle with folks you'd rather not share your business plans with.

Key Elements of a Startup Advisor Agreement

A Startup Advisor Agreement is like the rulebook of the game between startups and their advisors. It defines roles, expectations, and how everyone plays nice together.

Key Essentials of a Startup Advisor Agreement:

  • Defined Roles and Responsibilities: Lay it out straight: what’s the advisor doing for you? Whether it’s strategy or hiring help, make sure expectations are crystal clear.
  • Working Together, Legally: Put those confidentiality and non-disclosure bits in writing. Make sure it’s clear how sensitive info is handled and what happens if things go sideways.
  • Clear-cut Time Commitment: Advisors are juggling a lot. Agree on a time commitment that works for both, ensuring they’re there when you need them.
  • Equity Compensation Details: Break down the nitty-gritty of advisory shares. Ensure the agreement talks through vesting schedules and other finer points of equity compensation.
  • Vesting Schedule and Milestones: Ensure it’s clear when and how advisory shares vest and what happens if an advisor exits stage left earlier than expected.
  • Securing Confidentiality: Your secrets are precious. Ensure there’s a firm handshake on keeping information under wraps and protecting company secrets.
  • Termination Notices and Conditions: What’s the exit plan if things don’t work out? Clearly outline how and when the partnership can be terminated by either party.
  • Conflict of Interest Assurance: Ensure your advisor is not entangled in interests that clash with yours. Include clauses that confirm their advisory doesn’t muddle your paths.

Final Thoughts

Starting a venture and considering advisory shares? It's like picking the right backstage crew for your big show. Sure, it can be a tad confusing, but remember, it's all about setting the stage right.

With clear roles, understanding, and the right paperwork, you'll have a stellar performance. Dive deep, make informed choices, and remember, it's your show. Lean on your crew, but always be the star of your startup story.

Benjamin gave great tips to my start-up Blend for polishing and optimising my pitch deck, refreshing perspective. Recommend!