Stocks that companies issue have multiple categories, some of which you may not be aware of. However, the more you know about these stock options, the better it is for you to understand how stocks operate. “What are advisory shares?” you ask. Well, in simple terms, advisory shares are those stock types that companies give out to the advisors rather than the employees.
Advisory stocks are issued to advisors of start-up businesses instead of cash compensation. Advisors usually get options to purchase shares rather than getting the actual shares. These shares help affirm confidentiality while at the same time avoiding any conflict of interest.
However, they may also turn out expensive for young businesses. A financial advisor can be of great help to answer all your intricate questions regarding advisory shares. But for now, you may stay with me till the end of this article to understand what advisory shares are and how they operate.
Advisory shares are also popular as advisor shares and are financial rewards that come in the form of stock options. Advisors receiving advisory shares are people in business who have experience as senior executives or company founders. They exchange their contacts or insight in a budding business.
These advisors come from different attorneys and accountants. Those professionals receive a fee for their services. Advisors who receive advisory shares will not be expected to give technical guidance on contrast or taxes to the company. Rather, their job will be to offer strategic inputs and access to multiple networks of contracts.
As the term implies, only the startup advisors get their hold on advisory shares. Generally, advisors are not full-time employees of a company. They are professionals with industry experience, business knowledge, and huge networks that may help new company founders improve their learnings and lessen mistakes.
From angel investors to former founders to venture capitalists, start-up advisors may come in multiple forms. Typically, they have polished skills in a number of fields like software development, HR, marketing, sales, or even operations.
“The types of advisors you might engage with may change over the course of your startup’s lifecycle. In the early days, you might need more help with a product. As you get a bit larger, you might need help with how to position your business to be able to expand to international markets. And as your business gets even more progress, you’re thinking, how do I build a high-performing team around me? So [you ask], what are those experiences, what are those gaps that our team could benefit from an advisor?” – Cake.
The key point here is these advisors always walked the same way as you and possess intense expertise in those areas that may take you many years to fathom. So, if you are getting a chance, why not grab it? Getting the correct advisor is very important to your success, and understanding how to compensate them rightly is a skill in itself.
There are primarily two advisory share types:
Restricted Stock Awards
Restricted stock awards, or if you may call it a restricted stock agreement, are shares of ordinary or common stocks that are given to someone through the provision of service or paid by cash. Typically, these shares are subject to vesting needs.
A company issues RSAs at its very early stages. It offers advisors the chance to be the shareholders upfront and get the shares for the service they bring to the table.
The fair market value at this point is quite low. This means a lower and more favorable tax outcome may be there for the advisor. If the business uses a standard agreement, they are also free to distribute. Therefore, the business will not be burning any cash either.
Stock options are the right given to the advisors to acquire stocks at a pre-decided strike price.
If you know of employee stock options, you have probably heard of incentive stock options and non-qualified stock options. Advisory shares mostly fall under nonqualified stock options because of the service/ contractor relationship that the company has with the advisors.
The amount of equity that a company grants to its advisors varies considerably based on their influence, experience, and role. It also depends on the total time span that the company and the advisor are planning on working together.
Companies give advisors the option to buy shares rather than giving them the actual shares. This helps in avoiding a probable tax obligation if the company offers advisory shares worth a notable amount.
Advisory shares are mostly used as incentives for the advisors to contribute to the long-term success of a company. Company managers and executives, on the other hand, can receive shares directly rather than options.
Stock options will typically vest in a couple of years. This allows the company to delay the transfer of ownership to the advisors while having their focus on the long-term success of the company.
Frequently Asked Questions!! (FAQs)
Ans. Yes, companies may choose to sell advisory shares. You may sell these shares either through the open market or through private sale.
Ans. Diluting the advisory shares may result in the dilution of the existing shareholders. This is one of the drawbacks that advisory shares come with.
Ans. Regular shares, which are also known as equity shares, are stock units that go through selling and buying on the public markets such as the New York Stock Exchange or NASDAQ. These shares are available to every retail investor. Advisory shares, in contrast to that, are non-qualified stocks that only experts get as a payment method for their expertise or insights. They are not a type of incentive stock option that employees get.
I am hoping that you have your vision clear on “What are advisory shares?”.
These shares allow young businesses to motivate savvy experts and help them own their path of growth.
They are not appropriate for every company or advisor. But, they help founders tap important contacts and inputs without allowing them to run out of cash. Entrepreneurs who wish to part with equity and exchange for advice need to do a little homework beforehand.
Cheap advice in the planning stages of the company may get pretty expensive as the company starts to grow. It is simple to give away 1% in exchange for nothing. In contrast, it is a lot more tough to give away 1% of a multibillion-dollar market cap.