What is Advisory Share; A Non-Cash Compensation for Subject-Matter Experts

 What is Advisory Share; A Non-Cash Compensation for Subject-Matter Experts

1- Introduction to Advisory Share

An advisory share is a type of equity-based non-cash compensation paid

 by new startups to advisors for their contribution to the

 organization's growth. 

Advisory Share

An Advisory Share is a non-cash compensation to the potential financial experts

 Some Key Points

• In this article, you will seek comprehension guidance on the advisory share, how it works, its types & pros and cons, its key difference from ordinary shares, and how it can affect the growth of the company.
• These advisors provide their professional insights and add value to the company's networking. 
• Advisory shares are exchanged against advice, ability to guide, professional prudence, and advisor expertise. 
• How Advisory shares work managing the advisory relationship and how to hire the advisor are the key factors to consider.

 

2- Understanding the Advisory Share

Advisory share is also called advisor share, or advisor equity and it has its unique

 characteristics and does not provide ownership rights like ordinary shares.

Advisory shares are always come with a vesting schedule and certain commitments to met

 from the advisor side such as commitment to the new startup's success and addition of value

 for the company. Every new venture has a different purpose to offer advisory shares.

 It could be to attract top talent and give incentives to the advisor to commit time and

 expertise for the success of the company.

When a company is young and cash flows are tight, then it needs careful guidance from an

 the experienced advisor who has such financial expertise that can lead to achieving the financial freedom of the Advisor.

3- Types of Advisory Share

Different types meet certain purposes. There are two types including Stock Options and

 Restricted Stock Rewards (RSA). These are aligned with the advisor's interest and

 compensation against the time and expertise commitment for the company's long-term

 success. There is a legal distinction between Restricted Stock Reward (RSA) and Stock

Options.

   A) Restricted Stock Reward (RSA)

Restricted Stock Reward is also known as Restricted Stock Units (RSUs) or restricted Stock

 Agreements (RSAs). An RSA is an ordinary share to be delivered upon the fulfillment of

 vesting conditions and requirements. 

It is just like a direct grant of shares in the company not just an option. The vesting time can

 be the liquidity event. So, until the vesting schedule comes, RSAs are non-transferable. At

 the time of vesting, when  RSA is delivered at a fair market value of the new ventures,

 income tax is liable to pay and these taxes include federal tax, state tax, and local tax.

 For a newly born business, the fair market value of a share is shallow and there is a more

 favorable rate of tax for an advisor, So, it is a win-win situation. Since the advisor only

 benefits from the shares if the company succeeds, they are motivated to provide valuable

 advice and support.

   B) Stock Options

A stock option is a right to buy a stock at a predetermined price and then sell it and if the

 price of the stock increases, this opportunity provides a net increase between sale and

 purchase price to the advisor which is revenue. Normally advisory shares are known as

 non-qualified stock options (NSOs), the other form is Incentive Stock Options (ISOs). An

 ISO is an employee stock option only. So, the role and influence of the Advisor in a

 company affect the company's equity granted to Advisors.

4. Issuing Advisory Share

   Process for Early-Stage Founders

Early-stage founders need to make sure that following key considerations have been

 followed while issuing advisory shares. When an advisory share is to be issued, it is the

 point to note whether the founder is getting access to key business insights and networking

 growth or not that is not possible if he does not offer equity compensation.

     Ⅰ) Identifying the Need: 

Advisory shares can also excel in the early start-up journey of the company and play a very important

 role in its financial stability. First, we need to find all the business fields and areas that can benefit from

 advisory shares.

     Ⅱ) Finding Advisors:

 Once you have found your business need, the second most important job we do is finding

 an advisor, for we need a subject matter expert who specializes in a specific industry, or

 technology and meets our business needs. For this, we need to find advisors using different

 online platforms, business meetings, and networking channels.

     Ⅲ) Negotiating Terms:

 The negotiating terms enable us to determine the nature and level of the advisory

 relationship with our potential advisor.  It is to clarify whether the advisor will contribute

 his expertise in the Company's fundraising and, hiring process or will provide financial

 advice. 

He will make his share by contributing to the growth and in return he will get equity

 compensation. whether he will be available to perform his work, all the terms and

 conditions are determined between the advisor and the company.

     Ⅳ) Documenting the Agreement: 

Once you and the advisor have agreed on certain conditions, we need to bring all these terms

 into a written shape so that it will help us in our future work and mitigate any kind of legal

 issues and level of financial risk. 

This contract contains the details of the responsibility, types of share offers for

 compensation, what will be the negotiating process in the case of stock options, and

 what will be the terms and conditions of the conversion? Confidentiality and non-

disclosure business information clause is also added to the agreement.

 So, in short, it tells us what will be the responsibilities of the advisor, what will be his

 rights, what will be his scope of work, and how he will perform his services to the

 company.

     Ⅴ) Issuing the Shares:

The final stage is to issue advisory shares to advisors. This stage includes the process

 starting from share certificate delivery and making sure the ownership to the advisor is in

 writing.

5. Equity Allocation for Advisor

   Factors Influencing Equity Distribution

It can be very challenging to evaluate how much equity part be allocated to Advisors. The following key factors influence and help to make smart decisions. 

       Ⅰ) Advisor's Contribution:

The advisor's contribution level to startups is the key factor and can determine the equity

 allocation.  If the advisor's contribution gains valuable networks and strategic advice, it

 may warrant a large equity stake.

     Ⅱ) Stage of Startup

 In the early stage of startups, a high equity stake is offered as compared to when the

 business gets stability. When business is new, there is a high chance of potential

 contribution from the large equity stakeholder.

     Ⅲ) Market Rates

 There are industry-specific rates for different advisory services. So to attract highly

 experienced advisors a competitive rate may be offered. A typical market rate is 0.25 %

 to 5 % but depends on the advisor's contribution, stage of startups, business needs, and the

 future contribution of the Advsiro.

     Ⅳ) Vesting Schedule

A vesting schedule is a wait of time an advisor awaits to convert his equity shares into

 options. A high vesting schedule and future contribution of the advisor for a longer time

 warrant a high equity stake. 

6. How Advisory Shares Work

How advisory shares work depends on some industry norms which work differently from

 regular shares based on some considerations and structures designed to align the interests of

 advisors with those startups.

   A) Vesting Schedule

 One of the key factors of advisory share is the vesting schedule. It is a timeline over which

 an individual advisor waits to exercise his right of option to convert the equity contribution

 into shares or stock of the company. Time-based vesting and milestone-based vesting are

 typical types of vesting schedules. Typical vesting plans frequently length two to four

 years, boosting advisors to focus on the startup over an extended time.

      Ⅰ) Time-Based Vesting

The time-based vesting means that an advisor receives a share of the organization over the

 long haul, similar to each month or year.  It resembles a prize for remaining with the

 organization.

 For instance, if there's a four-year vesting plan with a one-year cliff:

• After four years, all stocks will belong to advisor
• The advisor will have to serve at least one year.
• The remaining stock of contribution will become theirs gradually, maybe every month or quarter as per contractual terms between the Advisor and the organization.

     Ⅱ) Milestone-Base Vesting

In the case of Milestone-based vesting, an advisor earns shares upon the specific accomplishments or goals, tasks, achievements, or targets, which make the stocks or options

 available for the advisor. In the case of Milestone-based vesting, an advisor earns shares

 upon the specific accomplishments or goals, tasks, achievements, or targets, which make

 the stocks or options available for the advisor.

Here is a list of Advisor's Tasks to Achieve.

 It is a task-oriented list to achieve in case of a milestone-based vesting schedule. This

 makes advisors motivated to help startups as well as to achieve milestones so that they can

 be able to get equity stake timely.

•      Hitting a certain Revenue Goal
•      Launching a New Product Line
•      Securing a Big Partnership
•      Valuable Business Deals

    Ⅲ) Hybrid Vesting

Hybrid vesting is a mix of time-based vesting and milestone-based vesting and creates a

 balanced incentive structure for advisors. For example, an advisor might receive a specific

 portion of the share after the completion of one quarter, or year and the remaining portion

 of the share after achieving specific milestones. 

Typical examples of hybrid vesting could include:

1- An advisor vesting 20% of their shares every six months, with the final 10% vesting upon

 securing a big partnership or certain revenue targets.

   B) Startup Advisory Agreement

A startup advisory agreement serves a key role in maintaining advisory relationships and

 terms of advisory shares in formal conditions. It is a legally bound agreement. It outlines

 the key details about the advisor's responsibility, the scope of operation to perform an

 advisor, the equity grant process, and vesting schedule, and any other important terms. In

 case of dispute, it plays a key role in solutions.

7. Finding a Startup Advisors

Here are the criteria for finding and selecting startup advisors.

   A) Criteria for Selection

     Ⅰ ) Industry Specific -Experience

The company founders should look for advisors who are subject matter experts in their field

 or industry. They should have comprehensive knowledge of the relevant industry, the latest

 trends challenges, and opportunities that startups may face in the early stage.

     Ⅱ) Track Record

See the historical record and performance of the advisor. Look for a potential advisor with a

 successful journey in startups. You can see the Advisor Role and number of successful

 startups in the past.

     Ⅲ) Network or String Connections

An advisor with a strong network in his industry or field has strong connections with

 potential stakeholders like customers, partners, or investors. 

     Ⅳ) Availability

Make ensure that the Advisor has enough time and is not too busy. He can produce the top

 level of dedication and support you need. Look for an advisor who has a passion for adding

 value to the company.

   B) How to Choose to An Advisor

  The advisor is selected for their best expertise in relevant domains and for their ability to

 offer strategic guidance. Here is the list of the process to choose an Advisor.

     Ⅰ) Define Your Needs and Research

Try to identify the key areas where there is a need for an advisor. Do research for potential

 advisors. You can find them online, at business meetups, or by asking for any

 recommendations from the relevant field experts. All these will narrow down your search

 for a potential advisor.

     Ⅱ) Interviewing the Potential Advisor

After you've identified your potential advisor, the next process is interviewing and

 evaluating his skills and capabilities to serve the startups. A scheduled interview is the best

 way to research potential advisors, set clear objectives, seek commitments, and discuss

 expectations.

     Ⅲ) Check References

Ask for references from past and current customers to evaluate the advisor's suitability and

 effectiveness in the startups.  

    Ⅳ ) Agreement on Certain Terms

Once you have chosen an advisor, there is a need for agreement on certain terms and

 conditions to mitigate startup and advisor's risk. This agreement is a commitment from both

 advisors and startups to start an advisory relationship. It contains the advisor's

 responsibility, types of equity compensation and stock options availability, and vesting

 schedule. 

8- Negotiating Equity With Advisors

   A) Effective Communication Stage

Clear and effective communication ensures that both are on the same page and avoids

 confusion. Negotiating Equity with advisors is the key factor and plays a key role in

 advisory relationships.

Here are strategies to negotiate equity with advisors.

     Ⅰ) Understand Your Need

Be clear about your need areas, what you expect from an advisor, and how much equity

 you're going to offer in exchange for their services.

     Ⅱ) Be Transparent

Always be honest and open about startups' financial conditions, future plans, expectations

 from advisors, and the value you offer in exchange for their services. Negotiate fairly.

     Ⅲ) Focus on Values

While discussing about equity offer, center around the value that the advisor will bring to

 your startup. Make a comparison of advisor expertise and financial insights and equity offer

 to the advisor and try to justify this balance in the best interest of the company.

    Ⅳ ) Consider Other Forms of Compensation

According to industry practice, equity is only one compensation for the advisory service. It

 is helpful in the early stage of startups due to a lack of cash. But other forms of

 compensation like cash or other perks may be attractive to the advisor. Be honest and never

 undervalue the advisor's service and ensure it is in line with the market standards and the

 advisor's contributions.

   B) Setting Expectations

It is important to set expectations from the advisor while negotiating the equity grant. This

 also outlines the expected time commitments, the advisor's responsibilities, and the way to

 compensate the advisor. 

   C) Documenting the Agreement

After negotiating and agreeing upon the equity grant, it's crucial to document the agreement

 in writing. This involves creating an advisory agreement detailing the terms of the

 relationship, including the equity grant, vesting schedule, and other relevant details. By

 following these strategies, startups can negotiate equity with advisors fairly, transparently,

 and beneficially for both parties, laying the groundwork for a successful advisory

 relationship.

9. Managing Advisory Relationship

   A) Maintaining Productive Partnerships

After issuing advisory shares and laying out the advisory relationship, startup founders

 should effectively deal with these relationships to guarantee they remain productive and

 beneficial.

    Ⅰ ) Regular Communication 

Keep in touch with your advisors consistently to keep them informed, stay up-to-date on

 your start-up progress, and seek their input on key decisions. This could include regular

 check-ins through meetings, phone calls, or written emails.

     Ⅱ) Update Your Advisor and Seek Advice and Feedback

Don't hesitate to update your advisor on significant developments within your startup. This

 can include key recruits, product launches, and strategic decisions that have a material

 effect on the organization. It helps them to be informed about startups' progress and

 challenges. Their professional insights and industry-specific experience are invaluable and

 assist in navigating the complexities of startup life.

    Ⅲ ) Recognize and Appreciate the Contributions

Recognizing and appreciating the contribution of your advisors motivates them.

 Acknowledgment of their professional efforts can assist with keeping positive and

 productive advisory relationships.

   B) Handling Challenges

A periodical review of advisory relationships guarantees to remain mutually beneficial.

 Despite best efforts, challenges might arise in managing advisory relationships. It is

 essential to address these challenges immediately and professionally. 

Some common challenges and how to handle them include:

   Ⅰ) Lack of Engagement

In case an advisor is not actively engaged, take proactive steps to understand the reasons

 behind their lack of interest. If necessary, consider revising the advisory agreement to better

 align with their interest and availability.

     Ⅱ) Changing Needs and Conflicting Advice

Sratup's needs evolve, as your startup develops. Ready to rethink and adjust advisory

 relationship so, they can keep on adding value to your startup.  In case, the advisor provides

 conflicting advice, consider the merits of each perspective and do what is best for the

 startup's interest.

10- Conclusion

Advisory shares are a non-cash form of compensation that startups offer to advisors for their

 contributions. This article provides comprehensive guidance on advisory shares, including

 how they work, types, pros and cons, key differences from ordinary shares, and their impact

 on company growth. 

Advisors offer their professional insights and networking, receiving shares based on their

 advice and expertise. Understanding advisory shares is crucial as they differ from ordinary

 shares, not providing ownership rights. Issuing advisory shares involves key considerations

 like identifying needs, finding advisors, negotiating terms, and documenting agreements.

 Managing advisory relationships requires regular communication, seeking advice,

 recognizing contributions, and handling challenges. By following these strategies, startups

 can negotiate equity fairly and transparently, ensuring a successful advisory relationship.

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