What Are Advisory Shares, And How Should You Evaluate Them?

At times, startup founders need mentoring. First-time founders need to gain experience in building companies. Good mentors, although rare, can add a lot of value. They can help in engineering, sales, and, more importantly, fundraising.

Since early-stage startups have little money, founders give mentors equity for their time and expertise. The reason is simple. If the startup becomes successful, this equity will be worth a mini fortune for the mentors. If not, then hard luck. Mentors, like founders, investors, and investors, also bet on startups to become big.

Legal and Tax Implications of Advisory Shares

In the dynamic world of startup mentorship and equity allocation, understanding the legal and tax implications of advisory shares is essential. Founders and mentors must be aware of the legal framework and tax considerations surrounding equity offers.

When granting equity to mentors, founders are effectively entering into a legal agreement. This agreement should be carefully structured and documented to protect all parties involved. Key legal considerations include vesting periods, stock option agreements, and any restrictions or conditions on the equity.

From a tax perspective, it's crucial to understand the potential tax consequences for both founders and mentors. Tax laws vary by jurisdiction and can significantly impact the financial outcomes of equity arrangements. Therefore, consulting legal and tax professionals is advisable to ensure compliance and optimize the equity structure.

Neglecting the legal and tax aspects of advisory shares can lead to unforeseen complications and liabilities. Founders should seek legal counsel and tax expertise to properly structure equity arrangements.

Understanding the legal and tax implications is as critical as finding the right mentor and determining the appropriate equity percentage in your startup journey. Addressing these considerations ensures a smoother and more secure mentorship experience.

How much equity should you give to a mentor?

Most founders overthink it. It's natural for them to overvalue their equity because all founders believe they are building an unicorn. Founders are naturally optimistic people. Otherwise, they would be betting their careers on something other than high-risk opportunities.

Founders only realize this equity is worthless once they raise significant venture capital. Only some investors are interested in buying secondary startup shares under a $50 M valuation. So, the mentors can only profit from this equity if the startup reaches a certain scale. It doesn't matter whether the mentor has 10% or 1%. He can't sell it for a dime.

However, it’s not implied founders should give 10% equity to mentors. They have to preserve it for future investors and employees. But 1 or 2% equity to an excellent mentor is fine.

Rather than thinking about whether to give 0.5% or 0.75% to a mentor, founders should spend time and effort finding good mentors. Most people masquerade as mentors don’t add value, and good mentors exist. They are just as rare as unicorn startups.

So finding good mentors is a challenge, especially in India, where every 10th person writes a mentor on his LinkedIn profile/Social Media Handles. Assuming you find someone who adds a lot of value to your startup, only bother a little with the vesting, ROFR, ROFO, and other complicated structures.

If you believe in a mentor, give him 1-2% depending upon the time he’ll give to your startup. If the startup becomes big, everyone, including you and him, will make a lot of money. If not, 0.5% will be as worthless as 10%.

Conclusion 

Finding the right balance between mentorship and equity is essential in startup mentorship and equity allocation. Understanding the legal and tax implications is crucial. To navigate these complexities effectively, partner with a seasoned CFO for expert guidance on equity allocation and financial strategies, ensuring a well-structured and successful startup journey.

Ready to optimize your startup's financial strategy and equity allocation? Contact CFO Bridge today to ensure a secure and prosperous journey for your venture!