Advisor equity compensation for UK startups: fair percentages, unapproved options, vesting rules

How Much Equity is Fair for an Advisor?

Before deciding on an equity slice, it is essential to establish that advisor equity is compensation for future, not past, contributions. The grant is designed to incentivise an ongoing relationship that delivers sustained value. Your first step is determining the appropriate amount, a decision that balances the advisor's potential impact against the need to preserve your cap table for future employees and investors.

The FAST Agreement as a Starting Point

A widely cited benchmark for this is the Founder/Advisor Standard Template (FAST) Agreement. While originating in the US, its principles provide a solid foundation for UK startups. The framework categorises advisors based on their level of contribution and the company’s stage, helping you move from a vague sense of value to a concrete equity figure. The key is to differentiate between 'Strategic' advisors, who provide high-level guidance and industry connections, and 'Functional' advisors, who offer specific, hands-on expertise.

A Strategic advisor might be a well-known industry figure who can open doors to key customers or investors, while a Functional advisor could be a marketing expert who helps you build your initial growth engine. The equity grant should directly reflect this expected value and the company's maturity.

Typical Advisor Share Options by Startup Stage

The reality for most early-stage businesses is pragmatic. The less established your company, the more valuable an advisor's contribution is, and the higher the equity grant should be. Here is a typical framework for advisor share options:

• Idea / Pre-Seed Stage: At this early point, an advisor's impact can be monumental. Their guidance can shape the entire business trajectory. Typical equity grants are Strategic (0.5% - 1.0%) and Functional (0.2% - 0.5%).
• Seed / Post-Product Stage: Once the company has a product and is finding market fit, the grants adjust downwards as the business is more de-risked. Typical grants are Strategic (0.3% - 0.7%) and Functional (0.1% - 0.3%).
• Series A and Beyond: For more established companies, advisor roles often become highly specialised. Equity is typically reserved for high-impact roles, with grants in the range of 0.05% - 0.2%.

Consider a UK biotech startup at the seed stage. They might bring on a renowned research scientist as a strategic advisor to guide their R&D roadmap and lend credibility with investors. A grant of 0.6% would be appropriate. Simultaneously, they might engage a regulatory expert for functional advice on navigating clinical trial applications, warranting a grant closer to 0.2%. Using these benchmarks helps you create a fair and consistent advisor compensation UK strategy.

How to Give Equity to Advisors in UK Startups: The Right Mechanism

Deciding 'how much' is only half the battle; the 'how' is where UK-specific tax and legal rules become critical. The most common mistake founders make is confusing the different methods for granting shares to advisors, which can lead to significant and unexpected tax bills for the recipient.

Direct Shares vs. Share Options: Avoiding the Dry Tax Charge

A crucial distinction for UK founders is between awarding shares directly and granting options. Directly granting shares to an advisor can trigger an immediate income tax bill on their market value. This is known as a 'dry tax charge' because the tax is due immediately, but the advisor receives no cash.

This means the advisor owes tax on an asset that is illiquid and may never realise any cash value, creating a significant financial burden. To avoid this, the standard and correct approach is to use share options. An option is not a share; it is the right to buy a share at a fixed price in the future. This structure defers any tax event until the options are exercised, aligning the tax liability with a moment when the shares might actually be sold for cash.

Unapproved Options: The UK Standard for Non-Employees

The correct mechanism for granting equity to non-employees in the UK is a Non-Tax-Advantaged Option Scheme, often called an Unapproved Share Option scheme. The term 'unapproved' does not imply any issue with the scheme; it simply means it does not have the specific tax advantages of government-approved schemes like EMI. This is the standard, HMRC-recognised method for consultants, contractors, and advisors.

The option agreement will specify a 'strike price', which is the price the advisor will pay to buy each share when they exercise their options. The strike price for unapproved options is typically set at the market value (AMV) of the shares at the time of grant. This value is often determined by a formal 409A/EMI valuation. Setting a fair market value is not just good practice; it is an important part of maintaining HMRC compliance and ensuring the arrangement is defensible.

Why the EMI Scheme is Not for Advisors

Founders often ask about using the Enterprise Management Incentive (EMI) scheme. It is vital to understand that the EMI scheme is strictly for employees. According to HMRC rules, an individual must be an employee working at least 25 hours per week or, if less, 75% of their total working time for the company to qualify. Advisors are non-executive contractors and do not meet this test.

Attempting to grant EMI options to a non-employee is a compliance failure. If discovered by HMRC, the options would lose their tax-advantaged status and be treated as unapproved options anyway, creating unnecessary administrative and legal risk. Therefore, Unapproved Share Options are the only appropriate vehicle for advisors.

Structuring Advisor Equity Agreements

Once the amount and mechanism are decided, the final piece is the advisor equity agreement itself. This legal document outlines the terms that govern the relationship, protecting both the company and the advisor. The most important components are the vesting schedule and leaver provisions, which ensure equity is earned for sustained performance.

Advisor Vesting Schedules and Cliffs

Vesting is the process by which an advisor earns their options over time. Its purpose is simple: to ensure equity is a reward for sustained contribution, not a one-off payment. If an advisor disengages, the company can reclaim the unearned equity. A typical vesting schedule for advisors is two years. This is often shorter than the four-year schedule common for employees, reflecting the more defined and high-impact nature of an advisory role.

Within this schedule, a 'cliff' is a standard and critical feature. A one-year cliff on a two-year vesting schedule is common. This means the advisor receives no options at all until they complete one full year of service. On their first anniversary, a large portion (often 50% for a two-year schedule) of their total options vest at once. After that, the remainder typically vests monthly or quarterly. The cliff protects the company from situations where an advisor leaves after only a few months having contributed little value but still holding a claim to a portion of the company's equity.

Leaver Provisions and Exercise Windows

Leaver provisions define what happens when the advisory relationship ends. It is a certainty that unvested options are automatically forfeited and return to the company's option pool. For options that have already vested, the agreement must be clear. In a typical leaver scenario, an advisor has a limited time, such as 90 days, to exercise their vested options by paying the strike price.

This clause prevents former advisors from holding options indefinitely, which is essential for keeping a clean and manageable cap table. A clean cap table is vital for future fundraising rounds, as investors will scrutinise who holds options in your company. Let’s walk through a scenario. A UK SaaS startup grants an advisor 12,000 unapproved options (representing 0.2% of the company) on a 2-year vesting schedule with a 1-year cliff.

• If the advisor leaves after 9 months: They have not met the 1-year cliff. They forfeit all 12,000 options. The company is protected from giving away equity for an incomplete contribution.
• If the advisor leaves after 18 months: They have passed the 1-year cliff and vested for an additional 6 months. Assuming 50% vests at the cliff and the rest monthly, they would have vested 75% of their total grant (6,000 for the cliff + 3,000 for the next 6 months), totalling 9,000 options. The remaining 3,000 unvested options are forfeited. They would then have 90 days to decide whether to purchase their 9,000 vested shares at the strike price set in their agreement.

A Practical Framework for Advisor Equity

Structuring advisor equity correctly in the UK requires a methodical approach that addresses fairness, compliance, and company protection. Platforms like SeedLegals and Vestd are commonly used to manage this process, but understanding the principles is paramount for any founder. Remember that share-based payments fall under specific accounting rules, such as IFRS 2, which your accountant will need to handle correctly in your financial statements.

Here are the key steps to follow:

1. Quantify the Grant: Use established benchmarks like the FAST agreement to determine a fair equity percentage. Base this on your company’s stage and the advisor’s expected contribution (Strategic vs. Functional).
2. Use the Right Vehicle: Always use Unapproved Share Options for non-employee advisors in the UK. This avoids the 'dry tax charge' associated with direct share grants and ensures you remain compliant, as advisors do not qualify for the EMI scheme.
3. Set Fair Terms: Implement a 2-year vesting schedule with a 1-year cliff. This is the market standard and aligns the advisor’s incentives with the long-term success of your startup while protecting the company.
4. Define the Departure: Your advisor equity agreements must include clear leaver provisions. A 90-day post-termination exercise window for vested options is typical and important for maintaining a clean cap table.

By following this framework, founders in high-growth sectors like SaaS, Biotech, and Deeptech can leverage world-class expertise to accelerate growth, confident that their advisor compensation structure is fair, compliant, and commercially sound.

Frequently Asked Questions

Q: Can I give an advisor EMI options if they are very involved in the business?
A: No. The EMI scheme is strictly for employees who meet HMRC's working time requirements. Even a highly involved advisor is legally a non-employee contractor. Granting them EMI options is a compliance failure. The correct and only HMRC-compliant method for UK advisors is using Unapproved Share Options.

Q: What is the biggest risk of granting shares directly instead of options?
A: The biggest risk is creating a 'dry tax charge' for your advisor. They would owe immediate income tax and National Insurance on the market value of the shares upon receiving them, despite getting no cash. This creates a significant financial burden and can damage your relationship with a valuable advisor.

Q: Is a two-year vesting schedule always the best for advisor equity agreements?
A: A two-year schedule with a one-year cliff is the most common standard for advisors, as it reflects a typical high-impact engagement period. However, it can be adjusted. For a short-term, project-based advisor, a one-year schedule might be more appropriate. The key is to align the vesting period with the expected duration of their meaningful contribution.