By Prakhar Rai, Founder, My Legal Pal. Advocate, Bar Council of India. LL.B, NLSIU Bangalore. Master of Business Laws.
Quick answer: An advisor agreement records what an outside advisor will do for your startup, for how long, and what they receive. It should cover scope, time, compensation, vesting, intellectual property, confidentiality, conflicts and termination. The country you incorporate in changes how you can pay an advisor in equity: US companies commonly use non-qualified options or restricted stock, UK companies use unapproved options or growth shares because the EMI scheme is for employees, German GmbHs often use virtual shares, and Indian employee stock option rules are written around employees and directors.
Key takeaways
- Advisors aren’t employees or founders. The agreement should say so and make clear they can’t bind the company.
- Never grant equity without vesting. An advisor who disappears shouldn’t keep a full stake.
- Get IP assignment and confidentiality in writing, even from casual advisors.
- The tax and securities treatment of advisor equity depends on the country. Check it before you promise a percentage.
- If an advisor starts working like staff, the label stops mattering. Misclassification is a real risk.
Most startups meet their first advisor over coffee. The advisor makes an introduction, gives a view on pricing, and somewhere in the conversation the founder says, “We’ll give you some equity.” Six months later nobody remembers how much, or what the advisor was supposed to do for it.
A casual promise of equity to an advisor is the kind of loose end that surfaces in investor diligence. It is much easier to write down when the relationship is new.
This guide covers advisors only. Co-founders are a different relationship, covered in our founders agreement guide, and employee equity is covered in our guide to ESOPs.
What the agreement should say
| Section | What to cover |
|---|---|
| Role and scope | What the advisor will and won’t do: introductions, product feedback, hiring help |
| Time commitment | Hours or meetings per month, so “advisor” doesn’t mean “available daily” |
| Term | A fixed period with a simple way to renew or end |
| Compensation | Cash, equity, equity-linked reward, or none, and when it is earned |
| Vesting | Equity earned over time, with a start period before any is earned |
| Intellectual property | Anything the advisor creates for the company belongs to the company |
| Confidentiality | The advisor keeps your information confidential |
| Conflicts | Disclosure of, and limits on, work for competitors |
| Status | Independent advisor, not an employee or agent, with no power to bind the company |
| Termination | Either side can end it on notice, and what happens to unvested equity |
Paying an advisor: four ways
- Cash. A fee per meeting or a monthly retainer. Simple, but cash is tight early.
- Equity. Shares, options or an equity-linked reward. This is where country rules matter most.
- Nothing for now. Some advisors help for the relationship or a future role. If so, say it, and don’t leave an implied promise hanging.
- A mix. A small retainer plus vesting equity is common.
How advisor equity works, country by country
United States
- Instruments. Companies usually grant non-qualified stock options or restricted stock. Incentive stock options are limited to employees, so advisors who aren’t employees receive non-qualified options.
- Securities law. Issuing equity is a securities offering and needs an exemption. Rule 701 under the Securities Act covers compensatory issuances to employees, directors and consultants or advisors who provide bona fide services that aren’t connected to capital raising.
- Tax. For restricted stock, a Section 83(b) election has to be filed with the IRS within 30 days of the grant. Option strike prices should be set by reference to a valuation (the 409A concept) to avoid tax penalties.
- Standard forms. A widely used startup template, the Founder/Advisor Standard Template (FAST), exists. Check any template against your own facts.
United Kingdom
- EMI options are for employees. The Enterprise Management Incentive scheme gives tax advantages, but it is limited to employees who meet its conditions. Advisors who aren’t employees generally can’t use it.
- Unapproved options. The alternative for advisors, which don’t need HMRC approval. The holder is generally taxed on exercise.
- Growth shares. Ordinary shares with a hurdle, so the holder benefits only from value above a set level. They can reduce the tax at grant but take more effort to set up.
- Giving free shares that already have value can create a tax charge, so take advice before issuing.
Germany
A GmbH share transfer requires notarisation, which makes direct share grants to advisors clumsy and costly. Many German startups use virtual share programmes (often called VSOPs), which give the advisor a cash payment on an exit event based on the company’s value. These are contract rights, not shares, and their tax treatment needs local advice.
India
The Companies Act, 2013 and the related rules build employee stock option schemes around employees and directors, with specific limits on who is eligible. An advisor who is neither doesn’t automatically fit. Depending on the facts, founders consider a direct share issue at an agreed price, a phantom or cash-settled arrangement, or another structure. Each has tax, valuation and company law consequences, and a foreign advisor can raise exchange control questions. Our comparison of phantom stock and ordinary shares covers one of these routes.
Everywhere else
Look for three things in any country: whether options or shares can be issued to non-employees, how the advisor is taxed and when, and whether a securities exemption is needed. If the advisor lives in a different country from your company, both countries’ tax rules can apply.
Vesting for advisors
Vesting means the advisor earns equity gradually. A start period, sometimes called a cliff, means nothing vests until the advisor has been involved for a minimum time. After that it vests on a schedule. The agreement should also say what happens if the advisor stops contributing.
A rule of thumb worth following: never give shares or share options without vesting. I’m not going to give you a standard percentage, because there isn’t a reliable one. It depends on stage, the advisor’s real contribution and how much of the company you’re willing to give up. Our cap table guide shows how advisor grants change the table.
IP and confidentiality
Advisors hear your plans and sometimes write things, such as a pricing model or a code review. In the US, work by an independent contractor generally isn’t owned by the company as “work made for hire” unless it fits narrow categories and is in writing, so use an explicit assignment. Other countries have their own rules on who owns what a non-employee creates. Our guide to IP assignment agreements explains why this matters.
Avoid the misclassification trap
If an advisor sets their hours, uses company tools and works only for you, they may look like an employee. Tests differ by country, but the facts matter more than the label. Our guide to the difference between independent contractors and employees sets out the usual tests. Keep real advisors independent, with limited scope and no day-to-day management.
Checklist before you sign
- Is the scope written so nobody can claim you promised more?
- Is the time commitment realistic?
- If equity is promised, is the route allowed and tax-efficient in your country and the advisor’s?
- Does vesting start from a defined date?
- Do you have IP assignment and confidentiality?
- Is it clear the advisor can’t bind the company?
- Can either side end it on notice?
For a view on how advisors fit alongside your founders and investors, our founder and co-founder advisory team works on this, and contract drafting can prepare the agreement itself.
Quick answers
Do advisors need a written agreement? Yes. A conversation isn’t enough once equity or confidential information is involved. Investors will ask for the paper.
How much equity should an advisor get? There is no reliable standard. It depends on your stage, the advisor’s contribution and the structure. Agree it in writing with vesting.
Can an advisor be an employee? They can, but then they have the rights and costs of an employee. Decide which relationship you want and document it.
Can I give an advisor options in any country? Not always on the same terms. US, UK, German and Indian rules differ, as shown above, so check your own country and the advisor’s before promising anything.
A note on who we are
My Legal Pal is an international team of contract lawyers with US law experience. We aren’t a US law firm, and we aren’t a local firm in every country mentioned above. This article is general information and not legal advice on your facts. Have a lawyer qualified in the governing jurisdiction check the details before you act.
About the author. Prakhar Rai is an advocate enrolled with the Bar Council of India and the founder of My Legal Pal. He holds an LL.B from NLSIU Bangalore and a Master of Business Laws, and works on contract drafting, review and disputes for founders and businesses across borders. Full profile
