Advisor Equity

Advisor equity means granting small percentages of shares or options to advisers who contribute knowledge, experience or industry connections to a venture. Early-stage companies use it to attract experienced people they cannot pay in cash.

Key Elements

• Percentage: Advisers usually receive a small percentage of the company, set according to the adviser’s contribution and the company’s stage.
• Vesting: Adviser equity vests on a shorter schedule than founder and employee equity, usually over one or two years.
• Cliff: A short cliff of three or six months is usually applied.
• Termination: Unvested shares lapse when the advisory relationship ends.

Shares or Options?

Granting shares directly makes the adviser a shareholder immediately and requires general assembly and registration formalities. In practice, therefore, advisers are mostly granted options under an employee stock option plan, or shares are transferred from the founders’ holdings after a set period. The chosen method should be shown in the cap table.

Points to Watch

• Advisory agreement: The scope of services, time commitment, confidentiality and the company’s ownership of intellectual property arising from the adviser’s contribution should be set out in writing.
• Employment risk: If the adviser in fact works under the company’s instructions and in a dependent manner, the relationship may become an employment contract; see Employee or Independent Contractor?.
• Tax: The value of shares acquired for services may be taxable income for the adviser; this should be assessed with a tax adviser when setting up the structure.
• Investor consent: The shareholders’ agreement usually makes grants outside the option pool subject to investor consent. Adviser grants within the option pool are excluded from anti-dilution protection.