How to Structure an Advisory Share Agreement: A Step-by-Step Guide for Entrepreneurs and Advisors
Starting and growing a successful business often requires more than just a great idea. It also requires great people like team, mentors and advisors. Having a network of knowledgeable advisors who can provide valuable guidance. To incentivize these advisors and ensure a mutually beneficial relationship, entrepreneurs often turn to advisory shares. In this article, we'll explore how to approach structuring these agreements, covering key aspects such as equity percentages, vesting periods, and advisory board roles.
Step 1: Define your Advisory Board's Role and Purpose
Before you start working with a legal team to structure you Advisory Share Agreement, it's crucial to clarify that role and purpose of your advisory board. Consider the specific expertise your need, whether it's in marketing, finance, technology, or other areas. Determine the strategic goals your advisors will help you achieve and how their insights will contribute to your company's success.
Step 2: Identify Potential Advisors
Seek out potential advisors who align with your business goals and values. Look for individuals with relevant experience, industry knowledge, and a strong track record of success. Network, attend industry events, and use online platforms to identify and connect with potential advisors.
Step 3: Determine Equity Percentages
Decide how equity you are willing to allocate your advisors. This can vary widely depending on your business's stage, industry, and the advisor's contribution. A common range is between 0.1% to 2% but i can go higher for key advisors. Be mindful not to dilute your ownership significantly.
Here's an article we wrote that covers more in detail on "What are Advisory Shares? - how to determine the right allocation"
Manoj Adithya
Step 4: Vesting Periods and Milestones
To ensure your advisors remain engaged and committed, it's essential to implement vesting periods and milestone-based equity releases. Vesting periods typically span 1 to 4 years, during which advisors earn their equity gradually. Milestones could include achieving revenue targets, product launches, or other measurable goals. This approach aligns the interests of both parties and incentivizes long-term commitment.
Step 5: Legal Counsel
Consult with legal professional expereinced in startup equity agreements. They will help draft the advisory share agreement, ensuring it complies with applicable laws and regulations. Seek legal guidance to protect your interests and those of your advisors.
Step 6: Drafting the Advisory Share Agreement
The advisory share should include the following key elements:
- Advisor's role and responsibilities
- Equity percentage and vesting schedule
- Term of agreement (ex: 1 year, renewable)
- Confidentiality and non-compete clauses
- Termination and exit provisions
- Dispute resolution mechanisms
- Advisor's compensation (ex: cash, stock options)
- Advisory board meeting frequency and format
- Liability and indemnification clauses
Ensure both parties fully understand and agree to the terms outlined in the agreement.
Step 7: Onboarding and Orientation
Once the agreement is signed, initiate an onboarding and orientation process. Familiarize your advisors with your business, team, and strategic goals. Provide them with access to necessary resources and information to help them fulfill their roles effectively.
Step 8: Regular Communication and Feedback
Maintain open lines of communication with your advisors. Regularly schedule advisory board meetings to discuss progress, challenges, and strategic decisions. Encourage feedback and be receptive to their insights and recommendations.
Step 9: Periodic Review and Adjustments
Ad your business evolves, periodically review the advisory share agreement. Asses whether the equity percentage, vesting schedule, and advisory board's composition still align with your company's needs and goals. Make adjustments as necessary to ensure a successful partnership.
Structuring an advisory share agreement is a critical step in building a successful business. Remember that these agreements should be flexible and adaptable to your unique circumstances, and seeking legal counsel is essential to protect your interests and ensure compliance with legal requirements.
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