Imagine you're at the helm of a promising startup. You have a vision, a talented team, and the drive to make it big. But as you steer your company through uncharted waters, you recognize the need for seasoned guidance. You identify industry experts and influential mentors who can help shape the strategic direction of your venture, but there's a challenge: How do you compensate them?
Sometimes, despite the best intentions and hard work, you might feel the need for an experienced navigator to guide you through the treacherous twists and turns of the startup ocean. This is where advisors and advisory boards come into the picture. They bring expertise, mentorship, and connections to help startups avoid pitfalls and accelerate growth.
Now, the question is: do you offer them advisory shares or go down the traditional equity compensation route? This article provides answers to this question to make informed decisions for your startup's growth journey.
What are Advisory Shares?
Advisory shares are specialized equity grants tailored specifically for those individuals who bring a wealth of knowledge, experience, and industry insights to a startup but in a capacity distinct from regular employment. While full-time employees immerse themselves in day-to-day operations, advisors often play a more strategic role, dipping in to provide guidance, offer solutions, or even connect the startup with potential partners or investors. They’re not typically involved in the daily grind, but their contributions can be instrumental in shaping the direction and future of a company.
So, why introduce a different form of equity just for advisors? The answer lies in the nature of the startup-advisor relationship. Unlike salaried employees, advisors often work with startups in a more flexible capacity, perhaps juggling multiple advisory roles simultaneously or dedicating only a portion of their time to any single venture. Monetary compensation might not always be feasible or reflective of their contribution. Instead, startups offer advisory shares as a token of future potential value. By aligning the advisor's potential rewards with the success of the startup, both parties have a shared interest in ensuring the company thrives.
It's also worth noting that advisory shares allow for a more fluid relationship between startups and advisors. As the needs of a startup evolve, they might require different kinds of expertise. Advisory shares offer a way to establish short- to medium-term relationships with multiple experts without diluting too much equity or incurring hefty payroll expenses.
Why Advisors Get a Different Type of Equity
When thinking about the intricate fabric of a startup, it becomes evident that every thread, or stakeholder, has its unique role. Advisors stand out distinctly in this ensemble, and so does their form of compensation. But why exactly do they warrant a different type of equity?
Nature of Involvement
Unlike full-time employees or even founders, advisors do not engage in the day-to-day operations of a startup. Their involvement, though less frequent, is often deep and profound. They might step in for quarterly strategy sessions, help troubleshoot a particularly challenging problem, or leverage their network for potential partnerships. Given this sporadic yet impactful involvement, offering them the same type of equity as regular employees might neither be equitable nor reflective of their contribution.
It's not uncommon for seasoned advisors to work with several startups simultaneously. Their extensive experience and industry knowledge make them sought-after resources. Offering advisory shares allows startups to provide a competitive compensation package that acknowledges the limited time an advisor can dedicate to any single startup. It recognizes their broad commitments and ensures that their contribution, though spread thin across multiple ventures, remains valuable and acknowledged.
The relationship between a startup and its advisors can vary in duration. While some advisors stay on for years, many engagements might last only for a few months—during a product launch, a fundraising round, or a pivotal business pivot. This transient nature of advisory roles demands a different kind of equity, one that offers value without tying the advisor down for the long haul.
Advisors, with their industry insights, often help startups in critical decision-making processes. Their equity should reflect not just the time they invest but also the strategic direction they help set. Traditional employee equity might not capture this distinction. Advisory shares, on the other hand, are specifically designed to value the strategic alignment advisors bring to the table.
Similarities of Advisory Shares with Employee Equity Compensation
In the intricate tapestry of startup equity, the lines between advisory shares and regular employee equity compensation can sometimes blur. While they serve distinct roles and stakeholders, they do share some foundational similarities.
1. A Tool for Stakeholder Alignment
Both advisory shares and traditional employee equity compensation function as tools to align the interests of stakeholders with the company's success. Whether you're an advisor guiding a startup through its strategic course or an employee working day in and day out, these equity instruments ensure that your rewards grow in tandem with the company's success.
2. Vesting Mechanisms
A core feature of both advisory shares and most forms of employee equity is the vesting mechanism. Vesting ensures that equity holders remain committed to the company over a specified period. While the duration and specifics might differ, the principle remains consistent: offer equity in chunks over time to incentivize long-term engagement and commitment.
3. Tied to Company Valuation
The value of both advisory shares and employee equity is intrinsically tied to the company's valuation. As the company grows and prospers, the worth of the equity granted increases. This direct link to valuation means that all stakeholders, be they advisors or employees, are incentivized to contribute towards elevating the company's value.
4. Potential for Future Liquidity
Whether it's through a public offering, an acquisition, or secondary market sales, both advisory shares and employee equity offer the potential for future liquidity. They represent not just a stake in the company but a future financial opportunity, making them attractive forms of compensation.
5. Subject to Dilution
As startups raise more capital or issue additional shares, both advisory shares and employee equity are subject to dilution. It means that while the absolute number of shares held remains constant, their percentage ownership in the company might decrease.
Key Differences of Advisory Shares from Employee Equity Compensation
While there are striking similarities between advisory shares and employee equity compensation, significant differences also exist. Listed below are their key differences to help you understand the unique attributes of each:
1. Nature and Frequency of Engagement
Advisory Shares: These are tailored for individuals whose involvement, though not daily, is influential. Advisors might pop in for pivotal meetings, offer high-level strategy recommendations, or broker partnerships. The intermittent yet impactful nature of their contributions justifies a distinct equity structure.
Employee Equity Compensation: Regular employees, on the other hand, are embedded in the daily operations of the startup. Their consistent contributions over longer durations demand a different equity compensation structure that acknowledges this persistent engagement.
2. Magnitude of Equity Offered
Advisory Shares: Given their less frequent engagement and the strategic nature of their role, advisors often receive a smaller percentage of equity. It’s designed to reflect their concentrated bursts of high-impact contributions without diluting significant company equity.
Employee Equity Compensation: Early employees, especially those joining at the startup's nascent stages, might receive a larger equity stake. This recognizes their high level of risk, consistent involvement, and the foundational role they play in shaping the company's trajectory.
3. Duration of Vesting Period
Advisory Shares: The vesting period for advisory shares tends to be shorter, often spanning 1-2 years. This shorter timeframe acknowledges the potential transience of an advisor's relationship with the startup and its specific milestones.
Employee Equity Compensation: For employees, vesting schedules are typically longer, often ranging from 4-5 years. This longer period underscores the desire to incentivize and retain key talent over the long term, ensuring stability and sustained growth.
4. Rights and Privileges
Advisory Shares: These shares might come with limited rights. For instance, advisors might not possess voting rights in company decisions, given their less frequent involvement.
Employee Equity Compensation: Regular equity holders, like employees and founders, often have more substantial rights, including voting privileges. These rights recognize their daily involvement and the consistent impact they have on company decisions.
Eligibility and Stakeholder Rights: Comparative Analysis of Advisory Shares and Regular Stock
Equity distribution in startups isn't merely a matter of percentages. It’s intricately tied to the rights, privileges, and responsibilities bestowed upon its holders. When examining advisory shares vis-à-vis regular stock, there are pivotal distinctions in eligibility and associated rights that founders need to be cognizant of.
Advisory shares, as the name suggests, are primarily earmarked for advisors—those experienced individuals who provide strategic counsel, industry insights, and valuable connections to a startup. Their eligibility is defined less by their hours of work and more by the quality and strategic value of their input. Unlike regular employees, advisors don't have fixed job descriptions or time commitments. Instead, they offer expertise in a flexible, often project-specific capacity. This selective eligibility ensures that startups can attract top-tier expertise without diluting excessive equity.
Contrastingly, regular stock, which encompasses equity granted to founders, early employees, and at times, key stakeholders, is tied to deeper, more consistent involvement in the company. It's an acknowledgment of the risk, dedication, and ongoing commitment these stakeholders bring to the table. Their eligibility is often linked to their roles, longevity, and potential impact on the startup's growth trajectory.
The stakeholder rights associated with these equity types further highlight their differences. Advisory shares often come with limited, if any, voting rights. Given that advisors typically don't engage in daily operations and may not always be privy to all internal developments, their shares might not grant them a voice in every critical company decision. On the other hand, regular stockholders, due to their persistent involvement and vested interest in the startup's success, usually have voting rights. These rights enable them to influence company decisions, from strategic pivots to potential mergers or acquisitions.
Additionally, when it comes to information rights or the right to receive regular updates about the company's financial and operational health, disparities might exist. Advisors, depending on their agreement, might get periodic updates, ensuring they have enough context to offer strategic advice. Regular stockholders, especially those in key operational roles, are typically more deeply informed, given their continuous involvement in shaping and executing the company's vision.
How RSUs Can Be Used as Advisory Shares
RSUs, or Restricted Stock Units, traditionally earmarked for employees, offer an innovative way to compensate startup advisors. Representing future stock grants, RSUs align rewards with a company's success, making them apt for advisors whose contributions, though intermittent, are pivotal. The simplicity of RSUs shines too; there's no upfront cost or immediate tax implications, a bonus for advisors engaged with multiple ventures. Importantly, their vesting can be milestone-based, ensuring advisors are rewarded in tandem with their tangible impact. Hence, RSUs provide a streamlined, performance-centric alternative to traditional advisory shares, marrying contribution with compensation seamlessly.
Want to know more about how RSUs can be an all-encompassing equity solution for your startup needs? Book a demo with Upstock today.