Frequently asked questions about startup advisory shares: who, how much, how, and when?

Ashot Arzumanyan

As pre-seed investors, we often provide guidance to founders on questions related to advisory shares or equity compensation for advisors. This can include questions about the appropriate amount of equity to give, the best form of agreement, whether to offer stock options or a restricted stock agreement (RSA) and the vesting schedule.

In this series of articles, we aim to provide a comprehensive guide to these topics. As a founder or advisor, you can use this guide as a reference while discussing startup advisor equity / equity compensation terms, and we are happy to provide additional assistance if you have further questions.

If you are looking to learn more about the legal/technical side of advisory shares, check out the second part of this guide here.

What are advisory shares?

Advisory shares are stock options given to advisors as a form of compensation for their involvement in your startup. In this article, we will explore all you need to know about equity for advisors, including how much equity to give advisors, how to choose advisors for your startup, and much more. Without further ado, let’s dive in.

Who should be a startup advisor?

“We are the average of the five people we spend the most time with”
Jim Rohn

A coffee and an intro are free, but for more you typically want a vested interest. Those people with vested interest are the advisors. Here are a few criteria that define an advisor:

  • they are at least 2-5 years ahead of you with their specific knowledge or experience;
  • they don’t have the time to be an employee or your company stage is too early for them;
  • or they are helping for a specific reason like industry connections and employing them wouldn’t make sense;
  • but, you also want them more invested in your success than just paying them like a contractor.

In the early stages of your company, you may meet people whose expertise you need and who you would hire, but you can’t afford them until you raise your Seed or A round. It can be a nice hack to involve them in your operations part-time as advisors who will hold advisory shares. This will demonstrate your ability to attract top talent and make fundraising easier.

While onboarding your advisors, it’s important to make sure you have a broad set of them. Typically, you would want to have:

  • Done-that-recently type of folks that can tell you what worked, what failed, and how they did it;
  • Strategic advisors – more senior people with broad knowledge and wide experience that can make strategic intros and you can pick their brains on your strategy.

That said, it’s always the job of the founder to navigate across various pieces of advice and make the decision. The better you master the art of this navigation; the more are odds of success.

Advisors who are excited about your product or have inner motivations to help are always more preferable, but there is a difference between excitement and the ability to practically meet your needs.

If you are successful on your startup journey you will outgrow any of your advisors because no one can have the full depth of the knowledge you gain as you advance on your way. Al Eisaian, serial entrepreneur, investor, speaker, and long-time mentor to countless tech founders and companies states:

"It is a good idea to keep written records and keep them in easy-to-find folders (digital or physical) for each advisor, focusing on objectives you intend to accomplish when you engage. Everyone’s memory fails or at least gets foggy over time and in order to keep good mutually-beneficial relationships over the long term, it’s best to keep good records. A mutually-respectful relationship can go a long way and deserves continuous care. Objectives that are critical now, once achieved might seem trivial later and it’s quite easy to forget the role of the original contribution.”

Who should not be a startup advisor?

As important as it is to think about who should be an advisor, it is good to also think about who should not be an advisor. Beware of people who:

  • have little or no experience you need,
  • have insufficient time available for you necessary to meet your expectations,
  • have no interest, and excitement about your business,
  • don’t ask a lot of questions and don’t try to understand your context well, or
  • want to make the decisions on your behalf.

The people that can help you most are those who genuinely believe in your mission and what you want to achieve. They won’t be a good advisor if they are in the advisory role just for prestige or advisory shares / equity.

A good advisor is like a doctor trying to diagnose as many potential symptoms as possible before arriving at a prognosis.

Sometimes influential people may want to give you advice you don’t need simply because they like to advise. For example, some of them may like entertaining themselves with angel investments and are inclined to push their useless advice on you as a bonus to their investment.

Be careful about mentors at accelerators and incubators. In many cases, incubators and accelerators bring in people that are influential, help them with the funding and setup, but are very irrelevant to startups. What these people usually want is to be involved, and the only way for them to do so is as mentors or advisors. In exchange, you may give them advisory shares or another form of compensation.

Keep in mind that some introductions are made with an intention to reward the people who are introduced rather than the founders themselves. Finding people who care more about merit than about rewarding their network is important for a founder CEO.

Just like founders, advisors keep learning from their mistakes. It’s ok. It just means that founders should take no advice for a granted truth.

Are investors also advisors?

Ideally, you want an advisor who has skin in the game with at least a small cash investment along with delivering the main value: time, connection to other advisors, investors, and customers. Most of the time that adds to a company's credibility and it’s self-explanatory: convincing a person to invest their time in your company is great, but convincing them to double-down with cash in exchange for advisory shares is even greater.

In very rare and select cases, if the deal is oversubscribed, giving someone the right to invest a small ticket in your company can be the benefit itself.

We may frequently hear that an investor is an advisor by default. Hence, if someone invested, they are supposed to advise without any additional compensation in the form of advisory shares. Well, that’s true and false depending on the circumstances (e.g. if you have 2 term sheets and pick the one with a lower valuation because you believe the investor is a better fit and value add, then, in a way, the lower valuation is the compensation for value-add investing).

Generally speaking, it’s good to keep in mind that we all compete for time. If you want someone to dedicate asymmetrically more time to you, then their compensation should be respectively asymmetric.

How much advisory shares or equity do startup advisors get?

This question is usually the most intimidating. As a founder you want to find the fine line between, on the one hand, increasing the value of your company by surrounding yourself with high-quality people and making quality decisions, and, on the other hand, not giving up unreasonably too much of your equity as advisory shares.

Uber's co-founder Travis Kalanik says:

“If your advisor is truly valuable, then you're gonna have to step up what you provide in equity in order to get real involvement, otherwise you'll be left with a potentially valuable advisor who gives you no time, or a useless advisor who gives you time you don't want or need. Any advisor that is valuable and involved will know his worth...
First figure out what value this person would bring as a full-time, then multiply that figure by the fraction of full-time you expect him/her to be involved. Now full-time is typically a salary and equity situation, and if the advisory is all equity, then the salary component should be moved over to the equivalent amount of stock based on a reasonable valuation of the company.”

For this so-called Kalanik method, all you need is: 

(1) your company valuation (your SAFE valuation cap is usually a good proxy if you didn’t raise a priced round); 

(2) the number of hours you expect your advisor to work over the vesting period (1 hour per week over 2 years comes out to about 100 hours); and 

(3) their salary converted to an hourly rate.

Note, that the standard hourly rate of a person (e.g. lawyer, consultant, etc.) is usually higher as it covers that person’s non-billable time and is relevant to short-term projects. For the purposes of this calculation, it is more reasonable to take an equivalent full-time annual salary.

Another thing to keep in mind is that the salary is not always a good estimate of the value. For instance, if someone helps you raise money, it’s good to keep in mind that an investment bank usually charges 5% of the raise as a success fee. So if you are raising $5M at a $20M valuation, the person who helps you (all-in, dedicated effort) probably deserves 5% x 5M / 20M = 1.25% of the company equity in the form of advisory shares.

Along with the Kalanik method, there is also a well-known rule-of-thumb method to determine the quantity of advisory shares introduced by the Founder Institute (“FI”). The FI guide is summarized in the table below:

Advisory share percentage depending on the advisor's performance level

For more information on definitions of stages and performance levels, check out Founder / Advisor Standard Template (FAST). This method works perfectly for quick decision-making when both parties are generally synced and relatively less sensitive to numbers.

Finally, be prepared to meet the 2% guys. Those are typically big-name influencers who may like you / your product and offer you a take-it-or-leave-it proposal to onboard them as advisors in exchange for 2% advisory shares. The decision is yours. In all cases that I know, the founders accepted it and it seems to work well.

How to get the most out of your startup’s advisors?

It's the job of the founder to make sure the advisor is an active participant in the success of the company. Don’t expect your advisors to be proactive. Although best advisors are proactive, it’s on the founder to set up a seamless process.

I took part in both low value add as well as highly productive advisory calls/meetings. The worst thing that can happen is when an unprepared founder discusses issues with unprepared advisors. 

As a founder, you are supposed to do your part of the homework and hold your advisors accountable. Here are a few useful tips & lessons learned:

  • Make sure the advisory meetings are periodical (e.g., weekly/monthly/quarterly). It’s ok to have sporadic or on-going meetings to discuss something specific, however, don’t let that affect the schedule of periodical meetings.
  • Send the meeting agenda and discussion items in advance. If you have specific questions that may require some preparation from the advisors, make sure to indicate those.
  • As you wrap up the advisory meeting, set up specific tasks and action items both for yourself and your advisors to be completed by your next meeting.
  • Hold yourself and your advisors accountable. Deliver yourself and expect deliverables from advisors.
  • In most cases, 1-1 calls/meetings with advisors are more productive. Ask yourself whether the benefits of “collective wisdom” are more than the dedicated 1-1 deep-dive.

Should you share sensitive information with advisors? The rule of thumb here is not to share more info than you believe is needed for the advisory role (assuming any sensitive information is shared with an NDA that is part of your advisory agreement). 

Advisors also should not seek to know more than needed - the less you know the easier to handle possible conflict of interest situations in the future.

Some good read articles to consider:

Are accelerators advisors & what’s their cost?

Technically an accelerator is an advisor. An accelerator would provide you with access to customers, investors, mentors, and space. Well, in the post-covid world space is no longer as relevant, but the first three are. 

Typically, an accelerator would be also an investor putting $20-150K at pre-defined terms. As of this date, YC invests $125K for 7%, Techstars invests $20k for 6%, and Berkeley Skydeck $200k at a $3M cap. 

To calculate the effective advisory shares that you give up to an accelerator, simply calculate the difference between your standard terms and what you give to the accelerator. For instance, if you consider YC and you can raise at a $5M cap, this means the equity you would give up for $125K is 2.5% - hence, 7% - 2.5% = 4.5% is the advisory stock you give up. 

Although there may be some contradicting opinions, I believe YC is the only accelerator to which first time entrepreneurs should not say “No” regardless of what you do and what stage you are at. For all others, you should do your due diligence and weigh the pros and cons.

How many shares is 1% of your company?

We usually say x% of the company, but there is a devil in the details when it comes to defining how many actual shares constitute x%. To elaborate on this, let us first understand what are (1) Issued and Outstanding shares and (2) Fully Diluted shares.

“Issued and Outstanding” means the number of shares actually issued by the company to shareholders. A common misunderstanding among founders is around mixing up “authorized” shares with “issued and outstanding” shares. When you do the incorporation (e.g., via Stripe Atlas, Clerky, or any other service), your company typically has 10 million “authorized” shares to be issued. Hence, the misunderstanding among founders is to think that 1% of the company is 1% x 10M shares = 100K shares, and that’s incorrect! 

What matters is the number of shares actually “issued” (e.g., you most probably issued 8M shares to the co-founders, meaning there are another 2M shares that are authorized to be issued at a later time (and not issued as of now). Hence, immediately after incorporation, 1% of the stock would be 80,808 shares and not 80,000 shares or 100,000 shares. You don’t include authorized but not issued shares in your calculations.

Things, however, get complicated when advisory shares, employee stock options, and SAFE notes appear on your cap table. This is when we start dealing with the concept of “fully diluted” which usually means issued stock (common and preferred stock, as if converted to common stock), issued options (or warrants, which are similar to options), and (usually) options reserved in the stock option pool. In other words, “fully diluted” assumes that the entire option pool has been granted, and that all of those options have been exercised. Let’s look at some numbers:

Cap table: advisory shares, employee stock options, SAFE notes

The table above demonstrates three different numbers of shares, each being 2%, however, the first one is 2% of the issued and outstanding shares, the second one is 2% of fully diluted shares, and the third one is 2% of the fully diluted shares assuming the option pool is fully granted. The latter is anti-dilution protection for the advisor preventing the dilution by issuance of new advisory shares from the stock plan.

If you include a percentage in any stock-related communication, you better clearly indicate the number of shares. The language along the lines could be: “Subject to Board approval, you would receive an option covering [X] shares of the Company’s common stock (representing approximately [X]% of the Company’s stock on a fully diluted basis including all shares reserved under the Company’s option plan).” 

If you choose to give a percentage of the issued and outstanding shares, then that should be clearly reflected in the wording accordingly.

Thank you

Huge thank you goes to Adam Bittlingmayer, Co-founder and CEO at ModelFront, Al Eisaian, co-founder at Intelinair, CEO at Cognize, and Hayk Mamajanyan, Principal at HVM Law Firm for comments and suggestions for this article about advisory shares, as well as to Andrew Coleman for editing and proofreading.


The information provided in this article does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available on this site are for general informational purposes only.

Should you have any further questions, let’s talk. You can get in touch or follow me on LinkedIn.