Financial Glossary
Advisory Shares
Advisory shares are equity grants -- typically in the form of stock options or restricted stock -- given to advisors who provide strategic guidance, introductions, or domain expertise to an early-stage company. They are usually a small percentage of the fully diluted cap table, subject to a vesting schedule tied to time or milestones, and granted in lieu of cash compensation. Advisory shares are distinct from founder equity and employee option grants and are governed by separate advisory agreements that define the advisor's obligations and the terms of the grant.
Problem & Application
Advisory share grants are often handled informally at early-stage companies -- a handshake agreement, a verbal commitment, or an unsigned term sheet -- which creates significant problems later. Without a signed advisory agreement and a formal grant, the advisor may claim a larger stake than intended, or the grant may be unenforceable. Tax treatment also matters: an advisor who exercises options at a low strike price may owe ordinary income tax on the spread, and a company that issues shares without a 409A valuation backstop can face IRS scrutiny on both the advisor's return and its own practices. Getting the paperwork right at grant time is far cheaper than fixing it during a funding round.
In Short
Advisory shares are a low-cash way to bring in expertise, but informal grants without proper documentation create cap table and tax exposure that surface at the worst times. Structure them correctly from the start.