Startup Advisor Equity 101: What Every Founder Needs to Know

Startup advisor equity compensates key consultants with shares rather than cash. It benefits the startup, which conserves liquid capital, and the advisor, who could reap significant rewards if the company thrives. 

In this article, we’ll discuss the basic types of advisor equity, industry norms for such agreements, and other considerations to make before issuing shares of your startup.

Startups frequently face hurdles, but lack the means to pay for expert guidance. Startup advisor equity, also called advisory shares, is a creative workaround. 

By granting equity instead of cash, startups can attract experienced and well-networked veterans to guide them. Not only that, but some advisors prefer equity compensation because of the potential upside.

Types of Startup Advisor Equity

Terminology can get confusing —  equity, shares, stock, ownership — especially when words could be used interchangeably or mean different things depending on context. 

Regular equity is an ownership stake that you can buy on the market. Think S&P 500 for publicly traded companies or Shark Tank for private sales. These shares come with voting rights, shareholder rights, and other protections.

Advisor equity, by contrast, is allocated in exchange for services and usually doesn’t carry voting rights. 

Generally, there are two types of advisor equity:

• Restricted stock awards (RSAs) directly award equity to advisors, subject to certain rules.

• Stock options grant the right, but not the obligation, to purchase shares at a pre-agreed price. 

In each case, the equity vests over the length of the engagement. Time frames vary, but two years is most common. Additionally, most agreements include a cliff period where no shares vest; this way, if the relationship isn’t a good fit, an amicable parting of ways is easy.

How Much Equity Do Startups Share With Advisors? 

The standard advice is to offer between 0.25% and 0.50% of the company. 

However, we can also draw insight from recent survey data. Across startup funding stages, equity compensation for advisors ranges from 0.01% to 1.00%, while the median across all stages is 0.13%. Newer companies offer more to compensate for higher risk and smaller valuations, while mature companies share less.

Types of Startup Advisors

Startups look for people who can address critical gaps. Advisors fall into two main categories:

• Subject-matter experts
  
• Recognizable industry veterans

The role of a subject-matter expert is clear. They bring specialized knowledge that the founding team or early employees may lack. For example, a technical founder may seek out someone with strong sales or marketing experience. 

Industry veterans, on the other hand, offer more than knowledge. They bring networks and credibility to new ventures. Their reputations can boost a startup’s visibility within the investor community, facilitate key introductions, and unlock otherwise inaccessible opportunities. 

Given the far-reaching impact of their influence, industry veterans may be granted a larger equity stake compared to subject-matter experts, particularly if their involvement drives significant growth.

What Can Startup Advisors Do for You?

An advisor’s role can range from passive to deeply involved, depending on your needs and their availability. Here are some common ways you can leverage their contributions to your mission: 

• Strategic feedback: Many startups schedule quarterly or monthly calls with advisors to discuss high-level strategy, evaluate progress, and get input on major decisions.
  
• Ad hoc expertise: Advisors often serve as on-demand consultants, allowing you to access their specialized legal, market, or strategic insights when needed.
  
• Key introductions: An advisor’s network is one of the most valuable aspects of their role. They can connect you to potential investors, talented hires, or key customers.
  
• Product feedback and refinement: By acting as early testers, advisors can offer objective feedback and help you achieve product-market fit.
  
• Brand ambassadorship: A well-connected advisor can elevate your reputation by speaking on your behalf at conferences, events, or on social media.
  
• Use of likeness in marketing: Startups often feature their advisors’ names, photos, and credentials in pitch decks or other marketing material. This is another way your advisors can lend credibility and enhance your appeal to investors, partners, and customers. 

How Do I Find an Advisor for My Startup?

Before you start searching, take a step back and clearly define your needs. What specific areas of your business could benefit from expert guidance?

For instance, if you’re a seed-stage startup, you might need help acquiring your first customers. On the other hand, growth-stage startups often prioritize raising capital. The type of advisor you select will depend on the challenges you’re currently facing.

Eric Migicovsky, whose startup was later acquired by Fitbit, offers a useful framework: seek out advisors who are three to five years ahead of your company within the same industry. These individuals have likely navigated similar hurdles and can offer insights that are both relevant and actionable.

Once you’ve identified the kind of advisor you need, treat the search like recruiting for a team member. Start by leveraging your network, reach out to industry contacts, incubators, and accelerators, and attend networking events where your industry gathers. 

The Startup Advisor Agreement 

Once you and your advisors have finalized terms, you’ll need to formalize the arrangement with a signed agreement. This document is your binding contract.

There are plenty of startup advisor agreement templates available that you can tailor to your specific situation. However, it’s essential to ensure it effectively mitigates potential issues. Key provisions to focus on include:

• Roles, responsibilities, and expectations: Clearly outline the scope of the advisor’s involvement.
  
• Type and percentage of equity: Specify whether the advisor is receiving shares or options and how much of the company’s total equity this represents.
  
• Vesting schedules and duration of service: Detail how and when equity will vest.
  
• Conversion mechanism: If options are involved, explain the process for converting them into shares.
  
• Confidentiality: Include clauses to protect sensitive business information.
  
• Intellectual property and non-disclosure: Ensure the company retains ownership of proprietary information and that it remains confidential. 

Pros and Cons of Issuing Advisor Equity

While advisor equity can be a powerful tool for attracting valuable expertise, startups must carefully consider trade-offs to ensure the arrangement supports their long-term goals. 

Perhaps the most significant advantage of offering advisors equity rather than cash is aligning your incentives. Not only do you conserve limited resources, but you also ensure that their success is tied to yours. Advisors only benefit if the business thrives, motivating them to actively contribute to your growth.

However, there are some important considerations to weigh before exchanging equity for advice:

• Dilution: Issuing new equity reduces ownership percentages of existing shareholders, which can make it hard to attract future investors or raise additional funding.
  
• Complexity: Establishing the necessary legal and administrative frameworks for equity compensation requires significant time and resources. Proper agreements and compliance measures must be in place.
  
• Loss of control: While advisor equity doesn’t commonly come with voting rights, sometimes it does. The more people with a voice in company decision making, the less control you retain.
  
• Equity sacrifice: What seems like an easy decision in the early stages could feel costly later. If the company becomes successful, the equity granted to advisors could represent a substantial share of a business’s value.
  
• Confidentiality risks: Advisors may be privy to sensitive business information. If they have ties to competitors within their network, there’s potential risk of information leaks. It’s essential to address these concerns in a well-drafted advisory agreement.

The Role of a Fractional CFO in Equity Management

Startups use a cap table—short for capitalization table—to track who owns what in the company. Initially, they’re pretty straightforward. A short list of founders and their respective ownerships may suffice.

But as your startup grows, the accounting gets more complicated.

You may have employees, investors, and advisors all receiving some form of equity compensation. Each package will have a vesting schedule and cliffs to track, different voting rights to consider, as well as intricate tax considerations to be wary of. 

If that sounds like you, indinero can help. Managing advisor equity doesn’t have to be a headache. We recently partnered with Y Combinator, have over 100 years of accounting expertise on staff, and our fractional CFOs are experts helping startups navigate startup funding rounds. With us, you’ll have the support you need to make smart, informed decisions. Schedule a free consultation today.