What Is An Advisory Share
Advisory shares are a stock option that’s given to startup advisors instead of employees. These shares might be issued to company advisors instead of financial compensation.
Startup advisors are typically given options to buy shares instead of being given the actual shares. Advisory shares facilitate confidentiality, and they also prevent conflicts of interest in a company. However, these shares might be costly for startups during the early years.
What Are Advisory Shares?
Advisory shares are also known as advisor shares. Typically, these shares are financial rewards in the form of stock options.
Business advisors who are awarded advisory shares are experts with previous experience as senior executives or business founders. They exchange their connections and insight for equity in a startup company.
It’s essential to note that these company advisors differ from attorneys and accountants. That’s because attorneys and accountants are usually paid a fee for their services.
Advisors who receive advisory shares aren't expected to give businesses technical advice on contracts and shares. Instead, they’re expected to provide strategic insights and access to a pool of connections.
Which Companies Issue Advisory Shares?
Many businesses that issue advisory shares are startup companies. The business might be just an idea at the time. On the other hand, the issuer might be in the later stages of seed capital or even later, when there’s an active and growing need to bring on advisors.
Startup equity to advisors varies considerably. The value of a startup coupled with an advisor’s expertise and role in the company may determine if the advisor will receive advisory shares. Also, whether an advisor will receive advisory shares may depend on how long the advisor and the startup company expect to work together.
Nearly 5% of the business’s total equity might be awarded to startup advisors. Sometimes a young business may form an advisory board and allocate equity as financial rewards for their board members.
Individual company advisors might get advisory shares ranging between 0.25% and 1% of the business’s equity. The exact percentage largely depends on how the advisor contributes to the business’s growth.
For example, a company advisor who offers advice for startups at monthly meetings may receive a smaller percentage of 0.25%. A company advisor who brings in a prospective client that later becomes a sizable customer may receive 1% of startup equity because of their concrete contribution to future revenue.
The more mature the business is, the smaller the amount of equity an advisor will receive. For example, a business in the idea stage may give 0.25% of equity to a startup advisor who attends monthly meetings. Whereas a business that is past the startup stage and is in the growth stage may award 0.15% of equity to the same advisor.
What Are The Pros And Cons Of Advisory Shares?
Advisory shares enable startup businesses to attract experienced advisors during crucial stages of the company’s development. However, it’s imperative to note that these shares have some potential drawbacks, along with their benefits.
Advisor shares may help in protecting a company’s confidentiality. Company advisors are likely to see marketing plans and product development ideas that companies want to keep secret. Which is why it’s advisors are often asked to sign non-disclosure and confidentiality agreements.
It’s also common for advisors to be working with multiple companies that share their interests. Businesses that issue advisor shares can’t restrict advisors from working with their competitors. However, they can figure out in the early stages of the working relationship whether an advisor has pre-existing arrangements that may hinder their ability to offer impartial advice.
That’s why it’s in your best interest to choose to offer advisors’ shares with a three-month trial period. During that time, you can terminate the contract before stock options are transferred to your advisor if it turns out that you two aren’t a great fit.
Final Thoughts
Advisor shares can enable young businesses to motivate savvy experts to guide them on their growth path. However, these shares aren’t appropriate for all advisors, nor for all companies. But they can enable startup founders to tap valuable insight and connections without letting go of scarce finances.
If, as a business owner, you’re willing to give company equity in exchange for insight and expertise, first, conduct some research. Cheap advice in your business’s planning stages could get quite costly as the business grows. It’s quite easy to part with 1% of nothing, but quite difficult to give away 1% of a multimillion-dollar market value.