Advisory shares are a valuable tool for early-stage startups to compensate advisors with a stake in the company that may later convert into shares of stock. These shares can take the form of restricted stock units or stock options, providing advisors with a potential ownership stake in the company.
Issuing advisory shares can incentivize advisors to contribute their expertise and connections to help the company grow and succeed. However, it is crucial to approach this compensation method with caution due to potential risks involved.
Understanding the mechanics of advisory shares and their issuers
Advisory shares are typically offered to individuals who offer valuable insights, mentorship, or industry connections to a company, guiding its growth trajectory. This compensation method is particularly common among early-stage startups that may lack the financial resources to provide cash compensation to advisors.
Advisory shares are usually distributed as a percentage of the company’s equity, with the specific amount varying based on factors such as the advisor’s role, experience, and the company’s stage of development.
Key distinctions between advisory shares and regular shares
Advisory shares differ from regular shares in terms of their recipients and structure. While advisory shares are exclusively reserved for advisors, regular shares can be allocated to employees or purchased by investors. Regular shares represent ownership in the company, potentially including voting rights and dividends.
Advisory shares may resemble regular shares in appearance, but they are typically granted before a company goes public. Alternatively, they may be issued as stock options, allowing advisors to purchase shares at a later date.
Varieties of advisory shares
Advisory shares come in various forms, such as restricted stock units (RSUs) and stock options, both of which may ultimately result in the advisor owning shares in the company. The initial offer may differ in appearance, depending on the type of advisory share.
Restricted stock units (RSUs)
RSUs are a type of equity compensation that can be awarded to company advisors in exchange for cash or services rendered. Advisors gain ownership of the stock upon meeting specific time or performance requirements, fostering their motivation to contribute to the company’s growth.
Stock options
Stock options grant advisors the right to purchase company shares at a predetermined price, known as the strike price. This option allows for the potential purchase of shares at a lower price than their current market value, but they come with expiration dates.
Advantages and disadvantages of advisory shares
While advisory shares can offer benefits to startups and businesses, it is essential to weigh the pros and cons before implementing this compensation method.
Pros
- Attracts experienced advisors
- Conserves cash for businesses
- Motivates advisors to contribute to the company’s success
Cons
- Dilutes ownership of existing shares
- Potential tax implications for company and advisors
- Possibility of conflicts of interest
Final thoughts
Advisory shares serve as a valuable compensation tool for advisors involved in early-stage startups, offering them a stake in the company’s success. Whether in the form of direct shares or stock options, advisory shares provide a non-cash mechanism for rewarding advisors. While this method can drive positive business outcomes, it is crucial to consider the implications of diluting existing shares and potential conflicts of interest. Careful evaluation of the pros and cons is essential before engaging in advisory share agreements.