Advisory shares are typically issued as common stock options (which can lead to equity in the company) to business advisors in exchange for their involvement within the company. Advisory shares usually have a 100% single-trigger acceleration with no vesting cliff that typically vest monthly over 1-2 years.
Advisory shares allow companies to delay the transfer of ownership to advisors while still providing an incentive for advisors to contribute to the company long term instead providing them with an immediate return on their investment in the company. Advisory shares are financially attractive to advisors because they incentivize them to offer advice while tying their earning potential to the success of the company issuing the advisory share.
When a company accumulates enough advisors they will typically set up an advisory board that meets regularly (weekly, monthly, quarterly, etc...) to combine their perspectives and offer strategic advice. Advisory shares given to a company's advisory board helps incentivize the advisory board members to stay organized, contribute to the company over a long periods of time, help strengthen relationships among advisory board members, and help align the incentives of each member of the advisory board.
The issuance of advisory shares is a most common among startup companies, but any company can choose to issue advisory shares. Company founders typically issue advisory shares to business advisors in hopes of adding a necessary skill set, or competency, they believe is lacking within the company or to boost their branding and trust. Some company founders do not have the ability to issue advisory shares without approval from their companies Board of Directors and stakeholders.
The majority of advisors provide their value to a company at the beginning stages of their advisory share agreement; even though they typically have a vesting period of 1-2 years (can be shorter or longer). This occurs because their advice is often strategic in nature, and their strategic business advice is exactly what is desired by the company issuing advisory shares.
- United States: The Founder / Advisor Standard Template (FAST)
Advisory shares require both parties, the company issuing the advisory shares and the advisor accepting them, to agree on four primary things: 1. The specific role the advisor will play within the company; 2. How the the company and advisor will work together; 3. The time commitment required (per week, per month, etc...) for the advisory role; and 4. The equity offered within the advisory shares agreement.
The company issuing advisory shares should be able to accurately articulate exactly the role the advisor is performing for the company, and how much time commitment to the company per month will be required of the advisor. Time requirements per month for advisors fluctuate because many advisors are contacted on a 'as needed' basis, and may be required to participate in advisory board meetings.
Equity provided through advisory shares to each advisor is dependent on the skills brought to the company by the advisor, and the company is required by law to ensure they have enough authorized and unissued common shares to cover any advisory share agreement they may enter into with an advisor. There is no standard set percentage of equity companies offer their advisors through advisor shares. However, a typical advisory share is often between 0.25%-1% of equity in the company vested over a period of 1-2 year, but in some cases advisory shares can higher or lower and vested over shorter or longer periods of time.
Clear confidentiality and intellectual property agreements should be in place before companies issue advisory shares to their advisors. Advisors may help with the development of intellectual property for the company and need to agree upon what will be included in the companies property and what will not be during and after their advisory period. Advisors may also become aware of confidential company information during their advisory period, such as financial models, customer information, or any of the companies proprietary information, and need to agree to keep that information confidential for the appropriate time period determined by the company issuing their advisory shares.
Companies issuing advisory shares need to take into consideration any conflicts of interest their advisors may have before coming to an advisory shares agreement. Advisors may be working with other companies, or be subject to other legal agreements, which may impair their ability to advise the company issuing advisory shares.
