Advisory shares in the UK: how much equity to give startup advisers

Advisory shares are a small equity stake, usually between 0.1% and 1% per adviser in a UK early-stage company, given in return for advice, expertise and introductions and earned over one to two years. Advisers cannot hold EMI options, so UK companies use unapproved options, growth shares or ordinary shares, and each is taxed differently.

What are advisory shares?

"Advisory shares" is not a legal class of share. It is shorthand for any shares or options a company grants to an adviser instead of, or alongside, a cash fee. Under UK company law they are ordinary shares, a separate class of shares, or options over shares, and the rules that apply depend on which you choose.

An adviser is not a director. A director, including a non-executive director, has statutory duties and a board vote; an adviser has no legal role and can be replaced by ending a contract. Moving from adviser to non-executive director changes how their equity is taxed (see below).

Why advisers cannot have EMI options

EMI is only available to employees who work for the company for at least 25 hours a week or, if less, 75% of their working time. A typical adviser is not an employee and spends a few hours a month on the company, so they fail both tests.

That rules out the most tax-efficient UK option scheme, which is why advisory equity costs the adviser more tax than an EMI option would cost an employee. If an adviser later joins as a qualifying employee, they can receive EMI options from that point. The detailed comparison is in our guide to EMI vs unapproved share options.

Which structure: unapproved options, growth shares or ordinary shares?

Most UK companies give advisers unapproved options. Growth shares suit companies that already have meaningful value, and ordinary shares work only while the shares are still worth very little.

Unapproved options

An unapproved (non-tax-advantaged) option gives the adviser the right to buy shares at a fixed exercise price, usually the market value on the grant date. There is no tax when the option is granted. When the adviser exercises, the difference between the market value of the shares and the exercise price is taxed as income. Advisers often wait to exercise until a sale of the company, so tax and proceeds arrive together.

Growth shares

Growth shares are a separate class that only shares in the company's value above a hurdle, usually set at or above today's equity value. Because they have no value until the company grows past the hurdle, their market value at issue is low, so the adviser can afford to pay it in full and avoid an income tax charge. Later growth is then taxed as a capital gain.

You need to amend the articles to create the class (see our guide to share classes) and obtain a supportable valuation.

Ordinary shares

Issuing ordinary shares outright is simplest when the company has just been formed and the shares are worth close to their nominal value. If the adviser pays less than market value, the shortfall is taxed as income at the time of issue. Shares that can be clawed back if the adviser leaves are "restricted", so the company and adviser normally sign a joint s431 election within 14 days of issue. The election means tax is measured on the unrestricted value now, and all later growth falls into capital gains tax.

Is the adviser a director, an employee or a consultant?

The employment-related securities rules in the Income Tax (Earnings and Pensions) Act 2003 apply to directors (including non-executive directors), office holders and employees.

For them, the s431 election, PAYE and National Insurance (where the shares are "readily convertible assets", for example because a sale is lined up) and the annual employment-related securities return by 6 July all apply. For a genuinely self-employed adviser who holds no office, those rules generally do not apply and the value is usually taxed as income of their consultancy instead. The adviser should take their own tax advice before signing.

How much equity should you give an adviser?

For most UK pre-seed and seed companies, 0.2% to 1% per adviser on a fully diluted basis, with the total for all advisers kept within roughly 1% to 3%. Scale the grant to the time committed and the value the adviser can realistically add, and cut it as the company's valuation rises.

Questions that should move the number:

• Time: two hours a month and two days a month are different jobs. Write the expected commitment into the agreement.
• Specific outcomes: a regulatory specialist who gets you through FCA authorisation may justify the top of the range; a general mentor usually does not.
• Stage: 0.5% of a pre-seed company and 0.1% of a Series A company can be worth the same in pounds.
• Cash: a modest monthly fee plus a smaller grant often suits operational advisers better than equity alone.
• Investors' view: large adviser grants are a common due diligence question. Each grant should be easy to justify to your next lead investor.

If the adviser reaches you through an accelerator, check whether the programme already takes equity, so you do not pay twice for the same mentoring.

Worked example: a 0.5% grant

A pre-seed company has 1,000,000 shares on a fully diluted basis (900,000 founder shares and a 100,000 option pool). It offers an adviser 0.5% after the grant, vesting over 24 months with a 3-month cliff.

• Number of shares: 0.5% after the grant means 1,000,000 × 0.005 ÷ 0.995 = 5,025 shares.
• Vesting: 3/24 of the grant (628 shares) vests at the 3-month cliff, then about 209 shares a month until month 24.
• Value: a documented valuation puts the shares at £0.10 each today. Two years later the company is sold at £4.00 a share.

The sale proceeds are £20,100 in every case. What changes is how much is taxed as income (up to 45%) rather than as a capital gain (currently 18% or 24% on shares), and when the tax is due.

Options defer everything to the exit but turn almost all of the gain into income. Shares bring a small tax bill forward and leave the growth to capital gains tax. Note that advisers rarely qualify for Business Asset Disposal Relief, which needs at least 5% of the company and an officer or employee role.

How should advisory equity vest?

Advisory equity usually vests monthly over 12 to 24 months, with a cliff of three to six months. Nothing vests before the cliff; at the cliff, the months already served vest in one go.

For a 12-month grant with a 3-month cliff, 3/12 vests at month three and 1/12 each month after that. If the relationship ends at month two, the adviser gets nothing. Set out what happens on a sale of the company before vesting ends: some agreements accelerate the unvested part on an exit, others let it lapse.

With options, unvested options simply lapse when the adviser leaves, and the agreement sets how long vested options stay exercisable. With shares, vesting works in reverse: the adviser owns all the shares at the start, and leaver provisions in the agreement or the articles require unvested shares to be transferred back, usually at the lower of cost and market value. A share buyback by the company has its own Companies Act requirements, so many companies provide for transfer to other shareholders or an employee benefit trust instead.

What the advisory agreement should cover

A short, signed advisory agreement prevents most disputes. It should cover:

• Scope and time: what the adviser will do and roughly how many hours or days a month.
• Equity: the number of shares or options, the class, the exercise price or subscription price, and whether the grant is subject to board approval.
• Vesting and leavers: schedule, cliff, treatment on a sale, and good and bad leaver terms.
• IP assignment: anything the adviser creates for the company belongs to the company.
• Confidentiality and conflicts: how confidential information is handled and what other roles the adviser holds.
• Status and tax: confirmation that the adviser is not an employee or director and is responsible for their own tax, with any s431 election attached.
• Termination: notice period and what happens to unvested equity.

Do not rely on a US advisor template: they refer to US securities and tax rules that do not apply to a UK company.

Valuing advisory shares for HMRC

The exercise price of an option, or the price the adviser pays for shares, should be at least the market value on the grant date. If it is lower, the difference is taxed as income, so you need a valuation you can defend.

• Recent funding round: the price paid by investors in an arm's length round is strong evidence of value, but a small minority holding is often worth less per share than investors paid.
• Before any round: the value is often close to net assets, which is why shares issued at nominal value straight after incorporation rarely create a tax charge.
• Growth shares: their value depends on the hurdle and the company's prospects, so an independent valuation is usually needed.

Unlike EMI, where you can ask HMRC to agree a value before granting options, there is no requirement to agree the value of unapproved options or shares with HMRC. Keep the valuation and its reasoning on file in case HMRC asks.

Recording advisory equity on your cap table

Every adviser grant should be recorded the day it is approved, on a fully diluted basis, so you and your investors can see the dilution before the next round.

• Options: approve the grant by board resolution and grant from your option pool or a separate advisory allocation. No shares exist until exercise, so there is nothing to file at Companies House until then.
• Shares: allot by board resolution, file an SH01 within one month, update the register of members and issue a share certificate within two months.
• Consents: check your articles and shareholders' agreement for pre-emption rights and investor consent rights before you grant.

In Undo Capital the cap table is a ledger: each grant, allotment and exercise is recorded as a transaction with its explanation and documents, rather than an edited cell.

You can create a custom share class for growth shares, set up an option pool with custom vesting saved as a template, and model a grant before you approve it to see the dilution for every shareholder. The board minutes for option grants are generated automatically, and on an allotment the platform generates the share certificates and the SH01 for you to file. If you are starting from scratch, see how to build a cap table.

Common mistakes with advisory shares

• Promising EMI to an adviser. The grant will not qualify, and the tax advantages are lost.
• No vesting. An adviser who goes quiet after two months keeps the whole stake.
• Nominal-value shares after a priced round. The gap to market value is taxed as income.
• Missing the 14-day s431 deadline. The election cannot be made late.
• Handshake deals. An email promising "1%" with no signed agreement becomes a due diligence problem.

Manage adviser equity in Undo Capital

Undo Capital keeps option pools, grants with custom vesting, allotments, share certificates and SH01s in one ledger-based cap table built around UK company law. Signed agreements and generated documents are filed in your data room, and the AI Copilot can answer questions about your option pool and cap table using your company's live data.