The term share refers to ownership rights of a portion of an enterprise, also known as stocks or equity. Businesses sell shares as part of their capital-raising process. Although entrepreneurs and consultants often acquire advisory shares, the employees tend to deal with regular shares. So, what are the differences between advisory shares and regular shares? Let’s find out.
What are Regular and Advisory Shares?
We’ll start with the simplest:
Regular Shares (Equity)
Regular shares (stock units) represent ownership in a company. A regular stock, also known as common stock, is a staple of most financial portfolios which are owned or awarded to founders, investors, or employees under varying circumstances.
Basically, you own a chunk of the firm when you own their shares. That means you get a part of the company’s profits, assets, and liabilities.
Remember, you don’t own a corporation; you own shares. It is essential to make this distinction since the company and you are different legal entities.
If the company defaults, your assets will still be protected. A shareholder is someone who owns stock, and they have the right to vote and have input into a company’s decisions.
They may also receive dividends every year on each stock they own—small amounts of earnings distributed throughout the year to each shareholder. Although this is very rare in the case of private companies. People may also sell stocks at a profit when they rise in value.
Advisory shares, however, are pretty different from regular shares.
Let us say you own 100% of a company, typically a startup, and you need some experienced guidance. That’s when the advisory team comes into action. In this case, the founders still own the control over business decision-making but incentivize the advisor for the expertise and assistance. Now what?
Instead of giving shares right away, you can give options with a vesting period. So, advisory shares are stock options that pay off at a predetermined vesting schedule. Your advisors will give you strategic insights and help you build a network. A financial consultant, tech advisor, or expert can be one of these individuals.
Advisory shares operate like regular shares because they offer shareholders special rights, like the ability to vote on important decisions and attend shareholder meetings. For example, a startup business will often give advisory shares to its resource persons to save capital while letting them profit early.
3 Key Differences Between Regular and Advisory Shares
Like stock options, advisory shares and equity shares have many similarities. As investment vehicles, these stocks can be valuable to shareholders.
Both of these stocks make you money over time if the company does well, leading to high profits if you sell them at the right time, though share sales in the private markets are difficult to execute.
Yes, now the differences:
1. The difference in stakeholder rights
An individual who buys shares of a company becomes a stakeholder with rights.
Stakeholders are collective owners of the company, so that they may want more insight into its performance. Before an acquisition or merger, the board must reach a consensus of stakeholders via voting.
Apart from electing the board members, shareholders are also in charge of protecting their rights.
Companies whose advisers and experts possess advisory shares may also form an advisory board. The advisory shareholder is assumed to have the same rights as a regular shareholder, with the added responsibility of offering expert advice.
Essentially, a regular share and an advisory share differ in their acquisition methods, regardless of their functional similarities, such as shareholder rights. As a result, these options are non-qualified stock options, or NSOs, instead of employee stock options or ISOs.
What are these now?
a. Income Stock
In income stocks, income is provided by the shares regularly—typically once to four times each year. Shareholders get paid from an organization’s surplus earnings at the end of the year in proportion to how much equity they own. As a result, income stock companies are generally less volatile than growth stocks, and their value takes longer to appreciate.
b. Non-qualified stock option (NSO)
NSOs—or non-qualified stock options—allow employees to benefit from the company’s success. The NSO provides an incentive for employees to be owners of a business.
Employees who exercise their stock must pay ordinary income tax on the profits. Advisors and consultants are also included in the scope of NSOs. Tax-wise, advisory shares are considered NSOs.
2. Eligibility criteria of individuals
In most startups, regular shares are available at the discretion of the individuals who acquire them.
On the other hand, experienced executives, partners, and key personnel who have previously run successful businesses are the most common recipients of advisory shares.
A business may not give advisory shares to all its consultants. The company’s accountants, analysts, and attorneys are included in this category.
3. Which companies offer these shares?
With an Initial Public Offering (IPO), large companies can make their shares available to investors on a stock exchange. As a result, publicly traded companies can generate a large volume of cash flow, even though the IPO process can be difficult and expensive. However, startups also award regular shares to investors and employees instead of salaries.
Startups typically award advisory shares to their advisors instead of paying them in cash since paying could deplete their capital pool.