If you are a part of a company, then you might have heard of advisory shares.
These shares are a type of stock option that some companies offer to company advisors.
They are often offered by companies to advisors instead of cash payments.
Advisory shares are something that cause a lot of people confusion, simply because they aren’t as well-known as regular shares.
In this guide, we’ll be taking a look at what advisory shares are, who is eligible for them, and lots more.
So, if you want to find out more, keep on reading!
First things first, let’s take a look at what advisory shares are.
As we have mentioned, advisory shares are a type of stock option that are often offered by companies to company advisors.
Most of the time, advisory shares will be offered by companies instead of cash payments.
In a way they are similar to both employee stocks and common stocks, however they have one key difference.
The difference is that advisory shares are only offered to company advisors.
They are not given to employees and they are not available in the same way that common stocks are.
You will only be eligible for advisory shares if you are a company advisor.
Essentially, advisory shares are offered as a non-cash option when companies cannot afford to give cash to their advisors.
Instead of having to give cash capital, the company (mainly startups) can offer shares in the business in return for the expertise of the advisor.
So, now let’s take a look at who is eligible for advisory shares.
Well, as the name suggests, the only people who are eligible for advisory shares are company advisors.
The main companies that will have advisors are start-ups.
A lot of the time, start-ups will not have much capital, and they definitely won’t have the capital to pay for advisors.
So, they give their advisors shares because at some point in the future, these shares will be worth a considerable amount.
Start-ups often require a lot of advice in order to succeed.
Most people who are creating start-ups have limited knowledge of the business, so it is a good idea to have advisors to guide you towards the right path.
Good advisors will accept advisory shares in return for their consultation, these will be an acceptable alternative to a cash payment.
Advisory shares are given at different amounts of equity.
Most of the time, you will not have a single advisor, instead a start-up company will have an advisory board.
Instead of individual advisors being given shares, the shares are given to the advisory board, and then split between all the different advisors.
But how much do these advisors usually get given?
Well, there are a number of things that will impact how many shares the advisory board is given.
This will include the experience of the advisory board, how much they are expected to contribute, the background of each advisor and more.
However, as a rule of thumb, the advisory board is often given 5% equity in the company.
This percentage will then be divided between the different advisors, with each advisor getting between 0.25 and 1% each.
Advisors who contribute more will receive a larger percentage.
Now that you know what advisory shares are, and who is eligible for them, let’s take a look at who issues advisory shares.
Well, as we said earlier, advisory shares are mostly issued by start-up companies to company advisors.
Company advisors will be individuals with explicit knowledge of the subject, industry, or starting a business.
The decision to take on advisors will be taken by the individuals who are starting up the company.
It will be a group decision, and most of the time, the decision will pay off.
A start-up might want an advisor for a specific part of their company, or for advice on a specific decision.
Alternatively, they might want an advisory board to help them with the start-up process itself. Either way, that is what the advisors are for.
So, advisory shares are issued by the directors of a start-up company to the advisory board and any individual advisors that they may have.
Now that we have taken a look at what advisory shares are, let’s take a look at some of the pros and cons of advisory shares.
Pros
There are lots of different benefits of advisory shares. By far, the biggest pro of these shares is that they can help attract experienced advisors to your company.
A lot of the time, advisors will prefer advisory shares over cash capital, so offering these shares will attract very specific advisors.
Another major benefit of advisory shares is that they can help protect the start-up.
Advisory shares maintain a level of confidentiality, and they can help protect things that you wouldn’t want made public yet (i.e., marketing plans).
When you have an official advisor, this person will be made to sign an NDA (non-disclosure agreement) which will prevent them from revealing any business decisions.
Finally, one of the biggest pros of advisory shares is that they help you secure advisors when you do not have the capital to pay them.
Advisory shares are perfect for start-up businesses, and that’s why it is great that they exist.
Cons
But, nothing is perfect, and there are some negatives to advisory shares.
The biggest being that it is tempting to overcompensate when it comes to your advisors. It is difficult to draw a line when somebody is really helping you out.
But it is important to put boundaries in place when it comes to your investors, remember, it is common for investors to help more than one start up at a time.
Summary
In short, advisory shares are company shares that are offered to advisors instead of a cash payment.
In return for advice, the advisors will be given a percentage share of the company. Find out more about this in the guide above.
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