Meaning
Financial instruments granted to external parties who provide high-level guidance or specialized industry knowledge to an organization. Such advisory options function as a performance-based incentive that substitutes for cash compensation. A recipient gains the right to purchase equity at a fixed strike price after a period of contribution.
Issuance Logic
Granting shares to non-employees requires a clear definition of the expected contribution and the time commitment required. These advisory options are usually smaller in volume than employee grants because the consultant holds less operational risk. Agreements specify the duration of the relationship.
Vesting Trigger
Time-based schedules ensure that the advisor remains engaged with the project through its critical development phases. If the consultant stops providing input, the advisory options cease to vest. This protection prevents the dilution of founders by passive participants.
Economic Value
Potential returns for the advisor depend entirely on the growth of the company valuation over the strike price. Holding advisory options creates a direct link between the quality of the advice and the wealth of the consultant. Success for the enterprise becomes success for the guide.
A process involves a calculation of future worth against the hours provided today. The advisor accepts the risk of total loss in exchange for the upside of a equity holder.
