What are advisory shares? A complete guide

What are advisory shares? They are a unique type of equity compensation often granted to startup advisors rather than employees. ‘Advisory shares’ is not a legal category of stock but a common startup term for equity compensation to advisors. If you’ve come across the term in a business context, you may be wondering what makes advisory shares different from regular stock options, how they’re structured, and why companies issue them.

This guide covers everything you need to know about advisory shares, from their meaning to their advantages, risks, and common practices.

Advisory shares meaning

Advisory shares are equity compensation given to individuals who provide guidance, connections, or expertise to a company – usually a startup. Unlike employee stock options, which reward ongoing work and responsibilities, advisory equity compensates external advisors for their strategic input without requiring a full-time role.

Typically, these shares are issued in the form of non-qualified stock options (NSOs), though some startups grant restricted stock or common stock instead, especially at very early stages. RSUs are less common and may appear in later-stage or public companies, though they are still unusual for advisors. Advisors may not receive them immediately but instead vest over a set period of time, ensuring the advisor remains engaged.

Find out more about shares with our guide to stock trading. As with all CFD trading, leveraged share CFD trading is risky and past performance is not a reliable indicator of future results.

Why do companies issue advisory shares?

For startups and early-stage businesses, cash is often limited. Instead of paying advisors large consulting fees, companies offer startup advisory shares as a way to:

• Conserve capital – avoiding high upfront cash payments.
• Align incentives – advisors benefit directly if the company grows and succeeds.
• Attract top talent – many experienced entrepreneurs, investors, and specialists are more willing to help if equity is on the table.
• Build credibility – well-known advisors bring reputational benefits when their names are attached to the company, just as Tesla shares gain visibility from Elon Musk’s reputation.

In short, advisory shares are both a cost-effective and strategic way to bring influential expertise on board.

How do advisory shares work?

How advisory shares work is similar to employee stock options but with a few key differences:

Equity grants

Advisors are usually granted a small percentage of advisory equity, often between 0.1% and 1%, depending on their involvement, reputation, and the stage of the company.

Vesting schedules

Just like employee stock options, advisory shares vesting typically occurs over time. A common schedule is two years, often shorter than the four-year employee vesting period. Many agreements skip the 1-year cliff, though some do include a short cliff (3-6 months) to ensure the advisor provides value before vesting begins.

Type of shares

Most startup advisory shares are issued as NSOs rather than ISOs. NSOs are required for non-employees and are taxed at ordinary income rates on the spread at exercise, with any subsequent gains taxed as capital gains upon sale. While straightforward in treatment, they are generally less favourable for advisors compared with ISOs available to employees.

Advisory agreements

The terms of an advisory share agreement are spelled out in a legal contract. This agreement defines the advisor’s role, compensation, vesting terms, confidentiality, and sometimes a termination clause if the advisor stops providing value.

Advisory shares vs stock options

It’s important to distinguish advisory shares vs stock options and other types of company equity:

The main difference is that advisory equity doesn’t require the advisor to be part of the company’s daily operations.

How much are advisory shares worth?

The value of advisory shares depends on the company’s growth and eventual exit (such as an acquisition or IPO). Early-stage startup advisory shares might be worth very little at the time they’re granted. However, if the company grows significantly, those shares could be worth a substantial amount.

For advisors, the upside is potentially lucrative – but there’s also risk. Many startups fail, making the shares worthless. Therefore, advisory equity is best seen as a high-risk, high-reward form of compensation. The strike price for NSOs is usually set by a 409A valuation, which determines fair market value at the time of the grant.

Learn more about what an IPO is and how it works.

Benefits of advisory shares

For both companies and advisors, advisory shares carry several advantages:

For companies

• Cost savings – preserve cash for operations and growth.
• Access to expertise – bring in seasoned professionals who may otherwise be out of reach.
• Reputation boost – advisory boards signal credibility to investors and clients.

For advisors

• Equity upside – potential to benefit financially if the company succeeds.
• Professional influence – opportunity to shape a company’s direction.
• Flexibility – no need for day-to-day involvement.

Risks and considerations

While advisory shares can be valuable, they also come with challenges:

• Dilution – as new funding rounds occur, advisory equity may represent a smaller percentage of ownership.
• Illiquidity – they can’t usually be sold until a liquidity event, such as an acquisition or IPO.
• Uncertain payoff – many startups never reach profitability or exit, leaving startup advisory shares with little to no value.
• Tax implications – NSOs for advisors are taxed as ordinary income at exercise (with additional capital gains tax on profits after exercise if the shares increase in value). Advisors should consult tax professionals before accepting equity.

Both companies and advisors should carefully review the advisory share agreement and consult legal or tax experts before proceeding.

Typical advisory share agreement percentages

The amount of advisory equity given to an advisor varies based on their role, the company’s stage, and the advisor’s reputation. A rough guideline often cited in startup circles looks like this:

• Junior advisor or specialist: 0.1%-0.25%
• Experienced advisor with strong industry connections: 0.25%-0.5%
• High-profile advisor (eg, ex-CEO, well-known investor): 0.5%-1%

These ranges are only benchmarks. In practice, every advisory share agreement is negotiated individually. In rare, very early-stage cases, grants may exceed 1%.

How advisory equity fits into startup strategy

Startup advisory shares are a strategic tool for early-stage companies. They help fill gaps in knowledge, networks, and experience without straining financial resources. For example, a fintech startup may grant advisory shares to a former banking executive who can open doors to partnerships. A biotech firm may offer advisory equity to a scientist who provides critical insights on R&D.

By carefully selecting advisors and structuring agreements, startups can leverage advisory shares to accelerate growth while keeping cash burn low.

Advisory shares key takeaways

Advisory shares vs stock options is a comparison every startup founder and advisor should understand. Advisory equity offers a cost-effective way for companies to access expertise while giving advisors a chance to share in potential success. However, they’re not guaranteed wealth – most startups face long odds. Both sides should weigh the benefits against the risks, seek professional advice, and craft a clear advisory share agreement.

By understanding what advisory shares are, how they work, and how advisory shares vesting operates, founders and advisors alike can structure fair, mutually beneficial relationships that help promising companies reach the next level.