Advisory Shares

What are advisory shares?

Advisory shares are equity a company gives an outside adviser in exchange for guidance, introductions or credibility rather than cash. In practice they are usually not issued shares. The common instrument is a stock option granted out of the company's equity incentive plan, vesting monthly over one to two years, sized in fractions of a percent.

What is an advisory share?

The singular is loose usage for one unit of an adviser's grant, and it hides the structure. An adviser is not an employee, so where the grant is an option it is a nonstatutory option and cannot be an incentive stock option. The FAST Agreement contemplates restricted stock or options; the option is the usual choice. Cooley puts the reason plainly: only employees can receive ISOs, whereas NSOs may be granted to any service providers, including employees, directors, consultants and advisers. The underlying statute is the source of that limit. Section 422 of the Internal Revenue Code conditions ISO treatment on the holder having been an employee of the granting corporation, or a parent or subsidiary, throughout the period ending three months before exercise.

So when someone says they were given advisory shares, the accurate reading is usually: a nonstatutory option over a small number of common shares, priced at fair market value on the grant date, vesting over 12 to 24 months, exercisable for a short window after the advisory relationship ends.

What is 2.5% in advisory shares?

It is far above every published benchmark for a single adviser, and roughly half of what an entire advisory board typically consumes.

The two most-cited published sources put the ceiling much lower. The Founder Institute's FAST Agreement, now at Version 3, updated July 2026, tops out at 1.00 percent, for an expert-level adviser at a pre-seed company. Cooley's guidance says a 24-month option grant to an adviser would normally cover between 0.15 percent and 0.75 percent of the company's fully diluted stock, depending on how active the adviser will be, how critical the adviser is to the company's success, and how mature the company is.

Where 2.5 percent does legitimately appear is at the group level. The Founder Institute notes that it is not uncommon for a technology startup to have a 5 percent pool of equity allocated to a group of strategic advisers or an advisory board. So 2.5 percent is plausible as half an advisory pool spread across several people, and implausible as one person's grant.

What the published benchmarks actually say

The FAST Agreement publishes a grid by company stage and level of engagement. Version 3 sets three stages, Pre-seed, Seed and Series A, against two published engagement rows:

• Standard, described as monthly meetings: 0.50 percent at pre-seed, 0.25 percent at seed, 0.10 percent at Series A.
• Expert, described as adding contacts and projects: 1.00 percent at pre-seed, 0.75 percent at seed, 0.50 percent at Series A.

Those percentages are total grants rather than annual rates. The Founder Institute's own illustration is that an adviser at that engagement level earns 1 percent of the company in the form of restricted stock or options vesting over a two year time period, while a similar level of engagement at a Series A stage company is compensated with just 0.5 percent.

Two conventions disagree about the cliff, and both are worth knowing because whichever one your counsel uses shapes the first quarter of the relationship. The FAST Agreement includes a three-month cliff on equity vesting, which the Founder Institute frames as a way to end an unproductive advisory relationship without allocating any equity in the first three months. Cooley's guidance says the opposite about market practice: vesting for adviser grants is typically monthly without any cliff, with the recommendation to pick a monthly basis-point rate and grant 12 to 24 months' worth vesting monthly over that period.

A worked example, with the vesting arithmetic

Assume a pre-seed company with 10,000,000 fully diluted shares. Figures are hypothetical; the percentages come from the published grids above.

• The company grants an expert-tier adviser 1.00 percent under the FAST grid: 10,000,000 x 0.01 = 100,000 shares under option.
• Vesting is monthly over 24 months: 100,000 / 24 = 4,166.67 shares per month.
• With the FAST Agreement's three-month cliff, nothing vests until month three, when 3 x 4,166.67 = 12,500 shares vest at once. On Cooley's no-cliff convention, 4,166.67 shares vest at the end of month one instead, and the totals converge by month three either way.
• Now the group question. Five advisers at the standard pre-seed rate of 0.50 percent each: 0.50 x 5 = 2.50 percent of the company. On this cap table that is 10,000,000 x 0.025 = 250,000 shares, the same 250,000 shares a single adviser would hold if somebody actually granted one person 2.5 percent.

That last line is the whole argument against the 2.5 percent single grant. The same dilution buys five advisers or one, and the five are far more likely to produce the introductions.

How it shows up in the documents

Three places, and skipping any of them causes real problems.

The equity incentive plan is where the grant has to come from. Cooley warns that a company's equity incentive plan or option plan may prohibit making option grants to these recipients, and that granting options the plan does not permit can create unintended tax and securities law issues that also complicate a future financing. The plan's definition of eligible participants is therefore the first thing to read, before the advisory agreement is signed.

The board consent is where the grant becomes real. Under option plans structured for grants to United States taxpayers, an effective option grant requires the formal approval of the company's board of directors. An advisory agreement promising equity, with no board action behind it, has granted nothing.

The strike price is where the tax rules bite. Under the section 409A regulations, an option over service recipient stock avoids deferred compensation treatment only if the exercise price may never be less than the fair market value of the underlying stock on the date the option is granted, and the number of shares is fixed on the original grant date. That is why a valuation has to exist before the grant, not after.

A fourth document, the advisory agreement itself, carries the deliverables and the termination right. The FAST Agreement exists precisely to standardize it.

Common mistakes

• Calling them shares and treating them as issued stock. They are usually unexercised options, which means the adviser is not a stockholder, has no vote and has nothing until exercise.
• Granting an adviser an incentive stock option. Section 422 does not allow it, because the adviser is not an employee.
• Promising equity in the advisory agreement and never obtaining board approval.
• Ignoring the post-termination exercise window. Cooley notes that most startup option plans require vested options be exercised within three months of termination of the adviser agreement or they expire, and that advisers, receiving NSOs, can negotiate a longer period.
• Sizing the grant off a number someone heard rather than a published grid. The gap between 0.10 percent and 2.5 percent is a factor of twenty-five, and only one end of that range has a source behind it.
• Assuming the relationship will outlast the vesting schedule. Cooley's observation is that most advisers seem to have a shelf life of less than two years, which is an argument for a 12-month grant and a renewal rather than a 24-month one.

How it relates to adjacent terms

Stock options are the actual instrument, and everything unusual about advisory equity follows from the adviser's non-employee status: nonstatutory rather than incentive treatment, tax at exercise on the spread, and a negotiable exercise window.

The option pool is where the grant is funded from, which is why advisory equity is not free even though it costs no cash. Every basis point given to an adviser is a basis point unavailable to the first engineering hire, and the pool is refreshed at the next priced round at the expense of existing holders.

The cap table is where the aggregate becomes visible, and it is the reason a diligence-minded investor adds up advisory grants before a round. Individually each grant is a rounding error. Five of them at the pre-seed standard rate is 2.5 percent, which is no longer a rounding error at all.

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