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Sometimes companies establish advisory boards to advise the senior management of the company (sometimes just the CEO) on strategic matters. Serving as a member of an advisory board for a company can be a great way to get to know the company in depth and keep track of what is happening. It will also help you develop a deeper relationship with the CEO and gain insight into the disruption of an industry. If you have useful domain expertise and the time to be an advisor, you may be able to increase the likelihood of success of your investment through your advice.
Being an active advisor can take time, and like BOD members, you will likely be asked to help with introductions to potential customers and sources of future funding, as well as recruiting of key employees, in addition to any domain-specific advice you may be able to offer.
confusion Advisory boards are not governing boards. That means that advisory board members do not have fiduciary duties. Nor are companies bound to observe the recommendations of an advisory board.
The advisor responsibilities and compensation are codified in the advisor agreement (advisory agreement or advisory board agreement). Advisor agreements will typically lay out the duration of the agreement, the amount of equity vested over the course of the agreement, and the vesting schedule.
As an advisor, despite not having fiduciary duties, you still might like to ask that your advisory board agreement include an indemnification obligation on the part of the company, in which the company agrees to indemnify you if you are sued as a result of your involvement with the company. If you would like to review an example advisory board agreement, the Founder Institute makes one publicly available.
You will likely get an equity kicker to your investment in the form of common stock or common options. Cash compensation for advisors is not typical, except perhaps for reimbursement of some minor expenses.
The amount of equity may depend on how impactful you think you can be, the stage of the company, and your ability to negotiate. The low end of the range might be 0.15% vesting over four years, while the high end might be 1% or more and might vest in only two years. You can find suggested equity ranges for advisors at differing stages of development on the Founder Institute FAST agreement. Typical vesting schedules are either monthly or quarterly and can include cliffs similar to employee vesting agreements.
Equity compensation for advisors is almost always in the form of non-qualified stock options (NSOs or NQSOs) on common stock, similar to employee compensation. The advisory agreement will state that the board of directors will issue a stock option grant to the advisor, and ideally it should be clear as to the time frame in which the stock option grant will be executed. In a timely manner, if not coincident with the agreement, the board of directors should issue the stock option grant. That grant will state the number of options and the strike price of those options. The strike price should be the fair market value at the time of the option grant. It should also state that the stock will be subject to the stock incentive or stock option plan.
confusionIf you receive an option you will want to make sure it gives you more than 90 days to exercise the option once you stop performing services. Companies can extend option exercise periods to as long as ten years from the date of the grant of the option.
Tax Consequences for Advisors
danger If you are receiving equity compensation as an advisor, it is advisable to be aware of the tax consequences:
If you receive stock, you usually have to pay tax on the value of the shares you receive when you receive them. If the shares are fully vested upon receipt, they are taxable upon receipt at their fair market value. For tax purposes, you are treated as if you received cash equal to the fair market value of the shares, and that you then used the cash to purchase the stock. If the shares are subject to vesting, you would typically want to file an 83(b) election so that you could pay tax on the value of the shares at the time of receipt instead of in the future, when the value of the shares might be even higher and the tax consequences even more severe.
If you receive a stock option, as long as the stock option has an exercise price equal to the fair market value of the shares of stock underlying the option, you will not owe tax on the receipt of an option.