Depending on the stage of development and the type of business, there are different ways of compensating your advisory board. So let's get practical.

First, a few assumptions: you are a startup and there have been relatively few stock transactions, but the stock should have value in the future, either through an IPO or merger. In this case, equity compensation is definitely the way to go. Equity compensation should be structured to avoid current taxable income to the recipient. This can be accomplished through either stock options or restricted stock. Check with your securities counsel or the AllBusiness site for example agreements.

How much you should compensate your advisory board depends on their level of involvement and the total number of advisors you intend to have. For a casual advisory relationship with few face-to-face meetings, a nominal 10,000 shares or options (assuming your company has 10,000,000 issued and outstanding shares of stock) is fair. The compensation amount could range up to 25,000 shares or options for a more-involved advisor, all the way up to 100,000 shares or options perhaps if the individual is devoting significant time — meeting with members of your company several times a week, or actively helping to develop a major business opportunity.

All these shares or options can and should be subject to vesting — two years for the lower amounts, and up to perhaps four or five years for the higher, 100,000-share-level awards. These vesting provisions should not have a cliff provision. This is one of the ways they are different from employee options or shares. Monthly vesting should begin to accrue immediately.

If your business is more likely to be a cash generator than a capital appreciation play, as most good small businesses are, you should skip the equity compensation, and stick with tried-and-true cash. Suggested payments are $1,000 to $1,500 a meeting, depending on your advisor's time commitment and level of inconvenience.