Advisory shares

Advisory shares refer to equity compensation granted to startup advisors in exchange for their expertise, guidance, and professional network. Unlike standard shares, advisory shares are typically non-voting and may not include the same economic rights. They are often used in early-stage startups as a non-cash incentive to attract high-value advisors.

Equity Compensation

Equity compensation is a form of non-cash payment where individuals receive ownership interests in a company. For advisors, this compensation aligns their incentives with the company’s long-term success, often delivered through advisory shares, stock options, or restricted stock.

Startup Advisor

A startup advisor is a non-employee expert who supports a startup’s growth through mentoring, strategic advice, industry insights, and networking. Advisors are typically compensated with equity rather than cash, and their roles vary by the company’s stage of development and specific needs.

Cap Table

A capitalization table, commonly referred to as a cap table, is a record that details the equity ownership of a company. It includes founders, investors, employees, and advisors. Advisory shares must be accurately represented on the cap table to reflect the full ownership structure.

Regular Shares

Regular shares refer to standard equity units that represent ownership in a company. These shares typically include voting rights and dividend entitlements. In contrast, advisory shares are usually structured to exclude such rights and are allocated for specific advisory contributions.

Vesting Schedule

A vesting schedule is a timeline that determines when an advisor earns full rights to their granted equity. This is used to ensure continued contribution and commitment. Vesting may be time-based, milestone-based, or a hybrid of both.

Time-Based Vesting

Time-based vesting requires the advisor to serve the company for a predetermined period before the equity grant fully vests. A common example is a four-year vesting period with a one-year cliff, where the advisor earns no equity until after one year, followed by gradual monthly or quarterly vesting.

Milestone-Based Vesting

Milestone-based vesting is tied to the achievement of specific objectives or deliverables. Equity is vested when the advisor completes agreed-upon tasks such as product launches, partnerships, or fundraising support.

Hybrid Vesting

Hybrid vesting combines both time and milestone conditions. Advisors must remain engaged for a specified duration and meet defined performance goals to fully vest their shares.

Cliff Period

A cliff period is the minimum length of time an advisor must be engaged before any portion of the advisory shares vest. If the advisor leaves before the cliff ends, they receive no equity.

Restricted Stock Award (RSA)

An RSA is a type of equity grant where the advisor receives common stock upfront, subject to vesting and potential forfeiture. This method is often used when a company’s valuation is low, making the tax implications minimal for the advisor.

Stock Option

A stock option gives the advisor the right to purchase company shares at a predetermined price, known as the strike price. Advisory options are typically non-qualified and subject to vesting.

Non-Qualified Stock Option (NSO)

NSOs are stock options granted to individuals who are not employees, such as advisors. These options are not eligible for the tax advantages of incentive stock options and are taxed at the time of exercise.

Incentive Stock Option (ISO)

ISOs are a tax-advantaged form of stock options granted only to employees. Advisors are not eligible for ISOs, which is why they generally receive NSOs instead.

Strike Price

The strike price is the fixed price at which an advisor can purchase shares under a stock option agreement. It is determined at the time of the grant and typically reflects the fair market value of the shares.

Fair Market Value

Fair market value is the estimated worth of a company’s shares at the time equity is granted. It is used to calculate tax liability and set strike prices for stock options.

Founder/Advisor Standard Template (FAST)

The FAST agreement is a standardized template developed by the Founder Institute to formalize the relationship between founders and advisors. It includes terms of equity compensation, expectations, confidentiality clauses, and vesting schedules.

Advisor Agreement

An advisor agreement is a legal contract that outlines the terms of the advisory engagement. This includes scope of work, equity grant details, vesting conditions, confidentiality, intellectual property, and termination clauses.

Confidentiality Clause

A confidentiality clause in the advisor agreement ensures that any sensitive information shared with the advisor remains protected. This includes financial data, business strategies, and product development plans.

Intellectual Property Assignment

This clause ensures that any intellectual property created by the advisor in the course of their engagement becomes the property of the company. It is essential for safeguarding proprietary innovations.

Equity Grant

An equity grant is the allocation of shares or options to an advisor as part of their compensation. The grant defines the number of shares, vesting schedule, and rights associated with the equity.

Equity Pool

The equity pool refers to a portion of a company’s total authorized shares reserved for distribution to employees, consultants, and advisors. Advisory shares are typically allocated from this pool.

Dilution

Dilution occurs when new shares are issued, reducing the ownership percentage of existing shareholders. Issuing advisory shares contributes to dilution, which must be managed carefully to maintain founder and investor confidence.

Boomerang Advisor

A boomerang advisor is a former advisor who returns to the startup in a new capacity, possibly after a break. The concept supports long-term collaboration and recognizes the value of accumulated knowledge and relationships.

Performance-Based Equity

Performance-based equity refers to advisory shares that are granted or vested upon achieving predefined goals or business outcomes. This approach strengthens the alignment between advisor contributions and company performance.

Strategic Alignment

Strategic alignment refers to the alignment of advisor contributions with the startup’s vision, mission, and business objectives. Equity-based compensation ensures that advisors are motivated to act in the company’s best interests.

Non-Voting Shares

Non-voting shares are equity units that do not provide the holder with voting rights in company matters. Advisory shares are typically issued as non-voting to preserve decision-making authority with founders and investors.

Cash Preservation

Cash preservation is the practice of conserving liquid capital by offering non-cash incentives, such as equity, to advisors and consultants. This is especially critical in early-stage startups with limited financial resources.

Equity Liquidity

Equity liquidity refers to the ease with which shares can be converted into cash. For advisory shares, liquidity typically occurs only during exit events such as acquisition or public offering.

Legal Compliance

Legal compliance involves adhering to applicable laws and regulations when issuing advisory shares. This includes tax considerations, securities law compliance, and proper documentation through formal agreements.