Advisory Shares: A Stepping Stone to Startup Success (for Advisors and Companies)
what are advisory shares : What Are Advisory Shares?
On July 22, 2024, startups are constantly seeking innovative ways to attract and retain top talent. While cash compensation is always a factor, many startups, especially those in the early stages, may not have the financial resources to offer competitive salaries. This is where advisory shares come in. Advisory shares are a form of equity compensation offered to company advisors in exchange for their expertise, guidance, and network connections.
Why Do Startups Offer Advisory Shares?
There are several compelling reasons why startups choose to offer advisory shares:
Benefits for Startups: Expertise and Guidance Without Breaking the Bank
Startups often require the guidance of experienced professionals in areas like marketing, finance, or product development. Advisory shares allow them to tap into this valuable expertise without straining their limited cash flow. Advisors with a stake in the company’s success are more likely to be highly invested and provide strategic advice that directly benefits the startup’s growth.
Benefits for Advisors: Ownership Potential and Alignment with Company Goals
For advisors, particularly those passionate about a startup’s mission, advisory shares offer the potential to share in the company’s future success. By owning a piece of the company, advisors become more aligned with the company’s goals and are incentivized to see the startup flourish. This creates a powerful win-win situation for both parties.
Types of Advisory Shares: Stock Options and Restricted Stock Units (RSUs)
There are two main types of advisory shares commonly offered by startups:
Stock Options
This grants the advisor the right, but not the obligation, to purchase shares of the company’s stock at a predetermined price (strike price) within a specific timeframe (exercise window). The advisor benefits if the company’s stock price increases above the strike price.
Restricted Stock Units (RSUs)
This grants the advisor actual shares of the company’s stock, but with restrictions on ownership. These restrictions, often referred to as vesting schedules, determine when the advisor fully owns and can sell the shares. Vesting typically happens over time, aligning the advisor’s interests with the long-term success of the company.
Key Considerations When Offering Advisory Shares
Several crucial factors need to be considered when structuring an advisory share agreement:
Setting the Right Grant Amount / what are advisory shares
The number of shares offered should reflect the value of the advisor’s expertise and the expected time commitment. Benchmarking against industry standards and considering the advisor’s experience level are important factors.
Vesting Schedules: Aligning Incentives Over Time
Vesting schedules should be designed to incentivize long-term commitment from the advisor. A common approach is to spread vesting over a period of 1-4 years, with a cliff (a period where no shares vest) at the beginning.
Legal Agreements: Clarity and Protection for Both Parties
A formal legal agreement outlining the terms of the advisory share grant, including the type of shares, vesting schedule, and repurchase rights (the company’s right to buy back unvested shares if the advisor leaves), is crucial. Consulting with a lawyer specializing in startup equity is highly recommended.
Conclusion: Advisory Shares – A Strategic Tool for Startup Growth
Advisory shares can be a powerful tool for both startups and advisors. For startups, they provide access to valuable expertise and guidance while managing cash flow. For advisors, they offer the potential for shared success and a deeper connection to the company’s mission. what are advisory shares When carefully structured and with clear legal agreements in place, advisory shares can be a win-win for everyone involved, propelling a startup towards long-term success.