Advisory Shares vs Equity: Choosing the Right Compensation Option

Advisory shares and equity are two popular compensation options for executives and advisors, but they serve different purposes and come with different benefits.

Advisory shares are a type of performance-based compensation that rewards executives for achieving specific goals or milestones.

Unlike equity, advisory shares are not a stake in the company's ownership.

Equity, on the other hand, represents a percentage of ownership in the company, giving executives a vested interest in the company's success.

Equity is often used to attract and retain top talent, as it provides a long-term incentive for executives to contribute to the company's growth.

Advisory shares are a type of ownership that provides a level of influence but doesn't necessarily come with financial rewards. They're often used in situations where the owner wants to provide guidance and support without giving up control.

Advisory shares can be used to incentivize key employees or partners to contribute to the company's growth. For example, a company might offer advisory shares to a key employee who helps develop a new product or service.

In some cases, advisory shares can be converted into equity or other forms of compensation, but this is not always the case. It's essential to understand the terms and conditions of advisory shares before accepting them.

Advisory shares are a type of ownership structure that allows investors to have a say in the direction of a company without holding voting power.

They are often used in private companies, particularly startups, to attract investors who want to contribute to the business's growth without being actively involved in management decisions.

Advisory shares typically come with restrictions on transferability, which means the investor cannot easily sell their shares to someone else.

This can help prevent the investor from having too much influence over the company, which may be a concern for the founders or existing shareholders.

Advisory shares and equity are two distinct concepts that often get confused with each other.

Advisory shares, as we discussed earlier, are a type of ownership structure that provides individuals with a voice in a company's decision-making process, but not necessarily a direct financial stake.

Equity, on the other hand, represents the ownership interest in a company, typically represented by shares of stock.

In a company with advisory shares, the holders may not have a direct claim on profits or assets, but they may still receive a percentage of the company's profits or a guaranteed minimum payment.

Equity holders, by contrast, have a direct claim on the company's assets and profits, and their ownership stake is typically represented by shares of stock that can be bought, sold, or transferred.

Advisory shares are typically not publicly traded and are not available to the general public. They are often awarded to advisors as a form of compensation or incentive instead of cash payments by startups.

The eligibility criteria for receiving advisory shares also differ, and are often more selective and based on the individual's specific industry knowledge and track record. Equity shares, on the other hand, are more readily available to individuals such as investors and employees.

Here's a comparison of advisory shares and equity shares:

Companies must carefully consider these differences when determining which type of shares to offer and to whom.

Equity shares are more readily available to individuals such as investors and employees who meet the requirements.

In contrast, advisory shares are typically given to experienced executives and key personnel who provide valuable guidance and expertise to the company.

The criteria for granting advisory shares are often more selective and based on the individual's specific industry knowledge and track record.

Issuance of advisory shares and equity shares follows different processes, each with its own unique characteristics and requirements. Companies must carefully consider these differences when determining which type of shares to offer and to whom.

Advisory shares are typically not publicly traded and are not available to the general public, whereas equity shares are traded on stock exchanges and can be freely bought and sold by anyone who meets the eligibility criteria.

Companies often implement a vesting schedule for advisory shares, outlining the timeframe over which advisors earn the right to their shares based on their continued service to the company. This ensures that advisors are committed and actively contributing to the company's success.

The vesting schedule for advisory shares includes the specific vesting terms, such as the vesting period, milestones, or performance targets that need to be achieved for the shares to fully vest. This clarity helps advisors track their progress and understand the timeline for the potential ownership of the shares.

Advisory shares also usually come with certain transferability and sale restrictions, which are carefully outlined in the advisory agreement. These restrictions ensure that the shares are not easily transferred or sold without meeting specific conditions.

Equity shares, on the other hand, are generally more freely transferable compared to advisory shares. While there may still be legal and contractual limitations on the transfer of equity shares, they offer greater flexibility in terms of buying, selling, and transferring ownership.

Here's a comparison of advisory shares and equity shares:

Advisory shares are a type of share that provides a return on investment but does not give the holder any voting rights. Unlike equity, advisory shares do not represent ownership in the company.

Equity shares, on the other hand, give the holder a percentage of ownership in the company and come with voting rights. Advisory shares can be a good option for investors who want to support a company without taking on the risks of ownership.

The characteristics of advisory shares and equity shares are distinct, with advisory shares often being used as a way to attract investors who want to provide guidance and expertise to the company without taking on financial risk.

There are three main types of startup advisors: Board Advisors, Technology Advisors, and General Advisors.

Board Advisors are experienced ex-founders or industry experts who are given a seat on your board of directors to help shape your strategy and influence decision-making.

These advisors are usually sought out for their input on the strategic direction of the company.

Technology Advisors help your company with their broad knowledge of the tech sector, often shaping the longer-term tech vision and roadmap.

They might implement technology best practices, system architecture, or even roll up their sleeves and join your devs in coding.

General Advisors are similar to Board Advisors but don't sit on your board, and have less input over the strategic direction of your company.

They might be an invaluable resource, even if they don't have a seat on the board.

Here's a breakdown of the different types of startup advisors:

Startup Accelerator Programs also utilize advisory shares to compensate mentors who provide guidance and support to participating companies.

Restricted Stock Awards (RSAs) are shares given to advisors that come with certain restrictions, such as vesting periods or performance milestones.

These shares often require advisors to remain with the company for a specified time before they can fully own or sell the shares, creating a strong incentive for continued involvement and support.

Typical terms for advisory shares include RSAs receiving 0.2-1% of a company and NSOs receiving 0.1-0.5% of a company.

A common setup is granting 0.25% to 0.75% of equity to the advisor - with a monthly vesting over 2 years, as suggested by Y Combinator partner Eric Migicovsky.

RSAs are larger because they are issued after incorporation but before there is an increase in the fair market value of a company.

Advisory shares offer numerous benefits to both companies and advisors involved. This form of equity compensation serves as a powerful incentive for advisors to actively contribute their expertise and guidance to the company.

Companies can reward advisors without depleting their cash reserves, which is particularly advantageous for startups and emerging companies that may not have significant financial resources. Offering advisory shares as part of an equity compensation package not only motivates advisors but also conserves capital that can be reinvested in the business's growth and development.

Here are some key benefits of advisory shares:

It's essential for companies issuing advisory shares to be aware of the legal and regulatory considerations involved, as compliance with securities laws and tax regulations is crucial to avoid potential legal consequences.

Advisory shares offer a cost-effective way for companies to compensate advisors without depleting their cash reserves. This is particularly advantageous for startups and emerging companies that may not have significant financial resources.

Issuing advisory shares can attract high-quality advisors who bring essential industry knowledge, networks, and credibility to the startup. This is because equity compensation ensures that advisors have a vested interest in the company's success, motivating them to provide valuable guidance.

A company can allocate no more than 5% of its total equity to advisors, and it can be much less. This is a general guideline, and the actual percentage may vary depending on the company's stage and the advisor's contribution.

Advisory shares can be a powerful incentive for advisors to actively contribute their expertise and guidance to the company. By providing advisors with a stake in the company's success, advisory shares align their interests with those of the company, fostering a collaborative and mutually beneficial relationship.

Here are some key benefits of advisory shares:

However, it's essential for companies issuing advisory shares to be aware of the potential dilution of ownership percentage for existing shareholders. This is a concern for founders and investors, and it's crucial to carefully consider the implications of issuing advisory shares.

Paying your advisor with a salary can be a straightforward approach, but it's essential to consider the type of advisor you're hiring. General Advisors, for example, are overwhelmingly compensated with equity only, at 81%.

If you're looking to pay a Tech Advisor, you're more likely to find one who prefers a mix of cash and equity, but this still only applies to 18% of them. Board Advisors, on the other hand, are more likely to receive neither a salary nor advisory shares, at 36%.

In fact, 48% of all advisors in our data set are compensated with equity only.

Advisory shares and equity can be tricky to navigate, especially when it comes to valuation. For advisors who get equity only as compensation, the higher the valuation, the lower the percentage of equity they should expect to receive.

It's not uncommon for advisors to receive a fixed percentage, and surprisingly, the median amount is often 1% regardless of the company's valuation. This suggests that 1% is a popular and widely accepted amount for advisors.

The amount of equity given to advisors also depends on their level of involvement. Advisors who work more than two days a month tend to receive significantly more equity than those who work fewer than two days a month.

Startup equity is a crucial aspect of startup employee compensation, and it's essential to get it right to attract and retain top talent.

In the UK, the amount of startup equity to give employees, advisors, and founders can vary greatly, but it's a good idea to start with a standard equity pool allocation.

Stock options can be a great motivator for advisors to contribute to the company's growth, as they have the potential to make a profit if the company's stock value rises above the exercise price.

Unlike Restricted Stock Awards (RSAs), stock options do not confer ownership until exercised, allowing startups to manage their equity distribution strategically.

Stock options can offer tax advantages for both the company and the advisor, depending on how and when they are exercised, making them a valuable tool in startup employee compensation.

Advisory shares are a type of compensation that startups give to experts, offering a small part of their company in exchange for advice.

Big names have used advisory shares to grow their companies by offering them to industry bigwigs for their golden advice.

Roughly speaking, no more than 5% of a company's total equity should be allocated to advisors.

The terms for advisory shares can differ depending on who you ask.

An advisor's compensation can depend on their contribution to the startup, with those who bring in new customers receiving a larger percentage than those who simply provide ideation services.

The company valuation has a surprisingly limited impact on the percentage of equity advisors receive as compensation. In fact, the median equity given to advisors is the same for companies with a larger valuation and those with a smaller valuation: 1%.

Advisors who work more than two days a month can expect to receive significantly more equity than those who work fewer than two days a month. This suggests that the amount of equity given is closely tied to the advisor's actual time commitment to the company.