What Are Advisory Shares?
Advisory shares give a company’s advisors a stake that may later turn into shares of stock. Early-stage startups often issue advisory shares instead of cash to compensate their advisors. Advisory shares can be restricted stock units or stock options.
For newer companies, advisory shares can encourage growth and motivate advisors to help the company succeed. However, there are a few risks, so it is important to use this tool carefully.
How advisory shares work and who issues them
Advisory shares are offered to individuals who provide valuable insights, mentorship, industry connections or other valuable services to a company. These services may guide the company toward growth and success.
Often, the company is an early-stage startup with little access to capital. Advisors may expect compensation, but the company may not have the cash to pay them. In these cases, the company may decide to issue advisory shares.
Typically, advisory shares are issued as a percentage of a company’s equity. The equity a particular advisor receives may vary based on considerations like the advisor’s role, experience and the stage of the company.
How advisory shares are different than regular shares
Advisory shares differ from regular shares in many ways, but the differences mostly boil down to who receives them and how they are structured.
Advisory shares are available exclusively to someone who advises a company, while regular shares can be issued to employees or purchased by investors.
Regular shares represent an ownership stake in the company and may include voting rights as well as the potential to receive dividends if the company issues them.
In some cases, advisory shares may look like normal shares, but they are often issued long before the company goes public.
In other cases, advisory shares take the form of stock options, where the advisor has the option to purchase shares at a later date.
Types of advisory shares
Advisory shares can take many forms, including restricted stock units (RSUs) and stock options. In either case, the advisor may end up owning shares of the company. However, the way the offer looks upfront will be different.
Restricted stock units (RSUs)
A restricted stock unit (RSU) is a form of equity compensation that may be issued to a company advisor. RSUs are generally issued in exchange for cash or services provided to the company. The advisor will own the stock when any set time period or purchase requirements have been met. For instance, this might include meeting certain performance metrics.
Often, RSUs are issued early in a company’s history when it may not have the cash to pay its advisors. However, it also gives the advisor an ownership stake in the company, so they will be motivated to see it grow.
Stock options
Another way to issue advisory shares is with stock options, which provide the right (but not the obligation) to purchase shares of stock in the company. Stock options allow investors to purchase a predetermined number of shares at a set price, known as the strike price.
One advantage of stock options is that you may purchase the shares at a lower price than the stock is worth at the time of purchase. But options have expiration dates so if you miss the window, they may be worthless.
Pros and cons of advisory shares
Advisory shares can benefit startups and other businesses, but there are pros and cons to consider before issuing them.
Pros
- Can help attract experienced advisors
- May allow businesses to conserve cash
- Can motivate advisors to help the business succeed
Cons
- Dilutes ownership of existing shares
- Can have tax implications for the company and advisors
- Can create conflicts of interest
Bottom line
Advisory shares are offered to advisors who provide services to a company, often a startup in its early stages. Advisors may receive shares directly or the option to purchase shares at a later date. However they are structured, advisory shares give businesses a way to compensate advisors without providing cash compensation. While this can improve business outcomes, it dilutes existing shares and can create conflicts of interest. Carefully weigh the pros and cons before issuing or accepting advisory shares.