Advisory Shares: What They Are and How to Negotiate Them

TL;DR: Advisory shares are equity grants to outside advisors, typically awarded as NSOs or RSAs. Standard advisors receive 0.25% at idea stage, dropping to 0.15% by growth stage. You vest over two years with a three-month cliff.

Your startup needs advisors. You know this. What you may not know is what equity to offer them. The answer lives in the FAST Agreement, developed by the Founder Institute at https://fi.co/fast. This free template sets benchmarks for every stage of your company. Use it.

What Advisory Shares Actually Are

Advisory shares are equity grants given to outside advisors. They come in two forms: NSOs (Non-Qualified Stock Options) and RSAs (Restricted Stock Awards).

NSOs let the advisor buy stock at a set price, called the strike price. When they exercise the option, they own shares. When they sell, they pay ordinary income tax on the gain.

RSAs are actual shares granted immediately, but they vest over time. If the advisor leaves before vesting completes, the company buys back the unvested shares at the original grant price.

Here is what matters: advisors cannot receive ISOs (Incentive Stock Options). The tax code restricts ISOs to W-2 employees. Advisors are contractors. This is a hard constraint under IRC Section 422.

Why does this matter? ISOs offer better tax treatment. Holders can pay capital gains rates instead of ordinary income rates on appreciation. Advisors miss this benefit. NSOs are standard for external advisors because there is no other legal option.

RSAs are rarer for advisors. They trigger immediate tax consequences. An advisor who receives RSAs must file an 83(b) election within 30 days of the grant date. This election says the advisor will pay tax on the grant value today rather than when the shares vest. Advisors often avoid RSAs for this reason.

How Much Equity: The FAST Benchmarks

The Founder Institute maintains the FAST (Founder-Advisor Standard Template) agreement. It includes equity benchmarks by company stage and advisor type.

There are three advisor categories

Standard Advisor: Provides ongoing advice and introductions. Low time commitment. Expects modest equity.

Strategic Advisor: Brings specialized expertise or industry connections. Moderate time commitment. Opens doors or provides specific guidance.

Expert Advisor: Highly credentialed in your space. Frequent engagement. Former founder, investor, or category leader.

Here are the FAST benchmarks

Idea Stage: Standard 0.25%, Strategic 0.50%, Expert 1.00%

Startup Stage: Standard 0.20%, Strategic 0.40%, Expert 0.80%

Growth Stage: Standard 0.15%, Strategic 0.30%, Expert 0.60%

These percentages represent fully diluted equity. They account for future funding rounds. A 0.25% grant at idea stage assumes you will raise capital and dilute this percentage. Do not think of it as final ownership.

Real data backs this up. Carta's H1 2024 equity report found a 0.21% median grant at pre-seed stage, 0.12% at seed, and 0.05% at Series A. Only 10% of pre-seed advisors received 1% or more.

The pattern is clear: equity decreases as you raise capital. Each funding round dilutes everyone, including advisors. This is why early-stage advisors get more shares than later-stage advisors for equivalent roles.

Consider Mark Gores at Dropbox. He received roughly 0.75% as an early advisor. He brought credibility and connections. Or Chip Conley, who advised Airbnb in its early years when the company was tiny. Later advisors at Airbnb, like Ashton Kutcher, received smaller grants because the company was larger and his role was more promotional than operational.

Vesting Schedules and Why They Matter

Advisors do not hold equity until they vest. Vesting protects your company from advisor drift.

The standard schedule is 24 months with a 3-month cliff. You grant 0.20% on day one. The advisor receives nothing for three months. On month four, they get 25% (0.05%). Then they receive 1/24 of the remaining grant each month. On month 24, the last shares vest.

A cliff means the advisor must stay for three months to earn anything. Without a cliff, they earn equity from month one. Cliffs are standard for outside advisors. Known, trusted advisors might negotiate for no cliff or a shorter one.

Why does vesting matter? It aligns incentives. The advisor stays involved because they want to vest their full grant. The company keeps the equity back if the advisor disappears in month two.

Some advisors negotiate for acceleration. Double-trigger acceleration is common: if the company is acquired and the advisor is terminated, their unvested shares vest immediately. This protects advisors from being replaced post-acquisition. Single-trigger acceleration is rarer and more expensive: all shares vest on acquisition regardless of the advisor's status. Avoid this unless the advisor is truly critical.

The Tax Traps

If you grant RSAs, the advisor must file an 83(b) election within 30 days of the grant date. This election is irrevocable. The advisor pays tax on the current fair market value of the shares, not the future sale price. This locks in a specific tax cost today.

Example: You grant an advisor 2,000 RSAs when your 409A valuation is $0.01 per share. The grant value is $20. The advisor files 83(b) and pays ordinary income tax on $20. If the company sells for $100 per share, the advisor owes capital gains tax only on the $199,980 gain ($200,000 sale value minus $20 already taxed).

Without the 83(b) election, the advisor would pay ordinary income tax on the entire $200,000 when the shares vest. This is worse.

For NSOs, the tax hit comes when the advisor exercises. They pay ordinary income tax on the spread between the strike price and the fair market value on the exercise date. Example: strike price $0.01, FMV $1.00. The spread is $0.99 per share. That is taxable income.

Both NSOs and RSAs trigger tax before any liquidity event. The advisor may owe taxes without the ability to sell. This is a key negotiation point. If the company is still private when vesting completes, the advisor faces a tax bill with no way to pay it from proceeds.

Your company must obtain a 409A valuation before granting any options or RSAs. This valuation sets the strike price and determines tax consequences. Get this done before offers go out. The valuation must reflect the company's fair market value, or the IRS may challenge it.

You must also comply with SEC Rule 701. This rule provides a safe harbor for private companies offering equity to service providers, including advisors. The safe harbor caps annual equity grants at $10 million for any single company. Advisors must provide bona fide non-capital-raising services. In other words, you cannot offer equity as a substitute for cash investment.

What Angel Investors Should Watch For in a Cap Table

When you review a startup's cap table, look for excessive advisor equity. Here is what to watch

1. Total advisor equity exceeding 3% of the company is unusual. It suggests either an exceptionally strong advisor group or sloppy equity management.

1. Advisors with 0.5% or more grants that are fully vested (or approaching full vesting) with no engagement are red flags. This suggests equity was granted but the advisor is inactive.

1. Multiple advisors at 1% or higher suggests the company either is very early stage (and that is appropriate) or has given away too much equity. Ask why.

1. Advisors with no cliff or accelerated vesting without a liquidity event deserve scrutiny. These terms suggest the founder lacked experience negotiating, or the advisor was powerful enough to demand favorable terms.

1. Missing 83(b) filings for RSA grants. Ask to see copies. If the company cannot produce them, the tax situation is unclear.

5 Terms to Negotiate If You Are an Advisor

You are an advisor. A startup offers you equity. What should you negotiate?

1. Vest Schedule. Push for no cliff or a one-month cliff if you are an established, trusted advisor. Push for acceleration if the company is acquired within your vesting period. Double-trigger acceleration is fair. Negotiate this before signing.

1. Strike Price. Ensure a 409A valuation exists before you accept the offer. The strike price should equal the 409A valuation. Do not accept a lower price. This creates tax problems for the company and unfair advantage for you.

1. Exercise Window. When you leave the company, you have a window to exercise your vested options. Standard is 90 days. Push for 10 years if the company is private and you plan a long-term holding. The longer the window, the more valuable the option to you.

1. Refresh Grants. If you are deeply engaged, ask for an annual refresh grant instead of a single large grant. Refreshes are taxed separately and keep your equity aligned as the company grows and dilutes.

1. Board Observation Rights. If you earn more than 0.75%, ask for board observer status. This gives you visibility into company finances and strategy. It is a modest ask for material shareholders.

Jeff's Take

Advisory equity is not salary replacement. It is not a lottery ticket. It is skin in the game for both parties.

When you grant equity to an advisor, you are saying their insights and connections are worth real ownership. The advisor is saying they believe in your company enough to tie some of their upside to yours.

The FAST benchmarks exist for a reason. They reflect years of data on what works. Use them. They protect both sides from the discomfort of negotiating from scratch. Do not overgrant. Do not undergrant.

If you are an advisor, understand the tax consequences before you sign. The 83(b) election is not optional for RSAs. The strike price matters for NSOs. Miss these details and you will overpay in taxes.

If you are an investor reviewing a cap table, advisor equity tells you about the company's advisory strength and the founder's sophistication in equity allocation. A well-designed advisor program shows discipline.

The best advisory relationships are clear about expectations. How often will you meet? What specific value will you provide? How long will the relationship last? When these are defined upfront, equity feels fair to both sides.

Disclosure: Jeff Barnes is an advisor to several early-stage technology companies. This article reflects general education and does not constitute legal or tax advice. Consult a securities attorney and a tax professional before granting or accepting advisory equity.