What are Advisory Shares? - how to determine the right allocation

What are Advisory Shares? - how to determine the right allocation

Advisory shares are a valuable tool for startups and growing companies seeking expertise, guidance, and support from experienced individuals who are not full-time employees. Offering advisory shares can help attract top talent, mentors, and industry experts to contribute to your company's success. In this blog post, we'll explore what advisory shares are and provide insights into how much to allocate based on the stage of your company's growth.

What are Advisory Shares?

Advisory shares, also known as advisory equity or advisor shares, are typically equity (usually in the form of stock options) granted to individuals who provide strategic advice, mentorship, or specific expertise to a company. These advisors are not formal employees but play a crucial role in helping the company navigate challenges and make informed decisions.

Determining the Allocation: Stage Matters

The allocation of advisory shares should be strategic and consider the stage of your company's development. Here's a breakdown of how much advisory equity to grant at different stages:

  1. Early-Stage Startups (Pre-Seed and Seed Rounds)
    • Typical Allocation: In the pre-seed and seed stage, advisory shares often range from 0.1% to 1% of the company's equity.
    • Rationale: At this stage, your company is in its infancy, with limited funding and a high level of risk. Advisors can play a critical role in shaping your business model, securing initial funding, and providing essential guidance. Therefore, a larger advisory equity grant is often offered to attract top talent.
  1. Growth Stage (Series A and Beyond)
    • Typical Allocation: As your company secures Series A funding and beyond, advisory shares typically range from 0.1% to 0.5%.
    • Rationale: By this stage, your company has demonstrated its potential, gained traction, and secured substantial funding. Advisors can still provide valuable insights for scaling, market expansion, or specific challenges. The allocation is lower than in the early stage to reflect reduced risk and increased stability.
  1. Established Companies (Positive Cash Flow and Beyond)
    • Typical Allocation: For established companies with positive cash flow, advisory shares generally fall within the range of 0.05% to 0.25%.
    • Rationale: Established companies have a solid revenue stream, market presence, and reduced uncertainty. Advisors often offer specialized expertise or strategic guidance for specific projects or initiatives. The lower allocation acknowledges the company's maturity and lower associated risks.

Considerations for Advisory Share Grants

  • Expertise and Contribution: The allocation should align with the advisor's expertise, level of involvement, and the value they bring to your company.
  • Vesting Period: Implement a vesting schedule based on the advisor's expected contribution timeline, usually ranging from one to four years.
  • Performance Metrics: Clearly define performance metrics and expectations for advisors, potentially tying the allocation to specific milestones or objectives.
  • Regular Review: Periodically review advisory share agreements to ensure they remain mutually beneficial and in line with your company's growth trajectory.

Advisory shares can be a strategic resource for your company, providing access to valuable insights and expertise. However, the allocation of advisory equity should be carefully considered and tailored to your company's stage of development. By aligning the allocation percentage with the advisor's contribution and the company's growth trajectory, you can make the most of this valuable resource while maintaining a fair and transparent equity structure.

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