In the fast-paced realm of startups, every company’s decision directly impacts its overall trajectory in its industry. One of the most pivotal aspects of a startup is its allocation of advisory shares. Advisory shares are of immense value to startups as they help them attract experienced talent to the brand and equip them to gain insight into their industry. With the help of advisory shares, startups can strategically navigate the new market they have entered.
This blog will highlight what startups should know about advisory shares and how they can use them.
What are advisory shares?
Advisory shares are also known as advisory equity. They are the shares of a startup company given to different individuals such as angel investors who help the startup function strategically. Individuals who provide mentorship, industry expertise, and any other form of support to the startup’s growth possess these shares. Advisory shares meaning the shares owned by advisers who mainly support the company and help the startup flourish with their meaningful knowledge and experience are paramount for startup growth. Advisory shares are integral for startups as it allows them to achieve their overall purpose. However, to use it beneficially, there are specific considerations that they must keep in mind.
Stating expectations clearly
In startup business financing, startups must state their expectations clearly before they offer advisory shares to any individual. These expectations can be regarding the advisor’s role, their responsibilities within the startup, and the expected contributions they are to make for the startup’s growth. These expectations must outline the time commitment, duration of the advisory relationship, and the expertise required by the startup. By clearly communicating the expectations and being upfront about them, the startup can eradicate misunderstandings and align its goals with the advisors.
Decide upon equity allocation
After clearly expressing the startup’s expectations, the next step is to decide on equity allocation. Equity allocation refers to how much equity the startup offers every advisor. This equity is not predetermined. However, the usual allocation ranges between 0.1% to 1% of the company’s equity. This percentage depends on various factors, such as the industry’s reputation, the stage in which the startup is functioning, and the advisor’s overall involvement within the startup. The startup needs to balance preserving its equity and incentivizing advisors so that it can save up for future seed funding rounds and create an efficient startup advisory board.
Vesting schedules and cliff periods
After determining the equity allocation, looking into vesting schedules and cliff periods is essential. Like employee stock options, advisory shares also come with vesting schedules and cliff periods to incentivize long-term commitment and align the advisors’ interests with the startup’s goal. Startups can vest advisory shares quarterly, monthly, or annually over a predetermined period. On the other hand, a cliff period ranges between 3 to 12 months, where the shares are provided in a monthly, quarterly, or annual schedule. This schedule equips the advisors to remain connected and committed to the startup’s success over a long period and allows the startup to benefit from the advisors’ insight.
Constant feedback
Any company’s operation depends upon efficient feedback. By maintaining transparency and creating an open line of communication between advisers and the startup’s stakeholders, startups can successfully maximize the value of the advisors. By constantly checking in and communicating with the advisors, the startup provides daily feedback on the company’s progress and can function lucratively within its market. This form of engagement allows the advisors to remain connected with the startup and also allows the startup to seek opportunities that can elevate its chances of success.
Performance evaluation
Advisory shares are a relationship between the advisors and the startup. By constantly evaluating the performance of advisors, the startup will be able to remain connected with them and ensure whether their advice benefits them. By assessing the expectations in the preliminary stages, the startup can evaluate whether the advisors benefit the organization and add value to its overall success and growth. This evaluation will help the startup increase its scalability and allow it to manage its funds efficiently when a particular advisor is not meeting the agreed-upon expectation.
Legal considerations
While advisory shares have a predetermined value in most cases, startups should also rely upon legal counsel to structure their advisory share agreements in adherence to the relevant laws and regulations of the country where they function. Furthermore, by relying upon legal counsel, startups can also maintain confidentiality, intellectual property rights, and termination clauses within the agreement to protect the interests of both parties involved. By relying upon legal counsel, the startup will experience a legal and ethical agreement process that allows it to maintain transparency with its advisors.
Conclusion
Advisory shares are an integral resource for startups seeking external expertise and guidance to function in a new market. By following the above-mentioned considerations, startups can successfully build a strong relationship with their advisors and ensure that their advisory equity contributes to their benefit rather than their demise.
I’m the CEO of SPV Hub. Being a founder/ co-founder (of multiple businesses) and investor (in multiple startups) myself, I experienced the challenges that an investor and a founder face while raising capital and handling multiple deals. So, we created SPVHub to simplify everything related to SPV creation and management.
I am also the co-founder of Startup Steroid.
