Startups are a lot like children who need guidance from their parents and other elder members of the family. They require help, expertise, and valuable insights from seasoned advisors. Advisors offer support to budding startups in return for compensation, which can be in the form of stocks. This article will explain the meaning of advisory shares and shed light on a few other related aspects.
Definition of advisory shares
Advisory shares, also known as advisor shares, are a type of stock granted to advisors as compensation. Many startups resort to this compensation alternative as they have limited funds to compensate their advisors adequately.
This is one of the best practices to offer flexible stock options to advisors for their guidance.
Which companies can grant advisory shares?
Typically, startups issue advisor shares. It is also common for many companies to seek advisors’ expertise during the seed capital stage and even later in the journey.
Compensation offered in advisory shares varies, based on the level of expertise, the role of an advisor in the organization they are currently working for, and the duration of the consultancy contract.
How are advisory shares different from regular shares?
One of the main differences between a common share and an advisory share is that advisory shares cannot be sold as standard stock units in the open market.
Advisory shares are categorized as non-qualified stock options (NSOs) instead of incentive stock options (ISOs) which are mostly given to employees.
Technically speaking, equity and advisory shares are the same. Equity is the same as stocks or shares in a company. In simple words, adding a certain amount of shares equates to one company stock.
Owning advisory shares means that advisors are partial owners of the company shares.
Vesting schedule defines when an employee can gain complete ownership of all employer-provided assets.
Compared to regular employees, the ball game is entirely different for advisors as far as vesting is concerned.
Typically, the vesting period for advisory shares is two years without a cliff. (Cliff vesting is when employees receive all the benefits from a company’s retirement program and pension policies on a specific date instead of obtaining these benefits in installments.)
As a result, over two years, advisory shares vest or are issued in monthly installments. However, if an advisor stops offering advisory services following the advisory agreement, the company is not obligated to pay them the full vesting schedule. (Once the startup evolves and scales, it would need different type of advisors than those at the early stages.)
Other contracts have a cliff of three months. This gives both parties enough time to determine whether this partnership provides value and works out.
Advisory shares in Shark Tank India
Last year, in the popular show Shark Tank India, we learned a thing or two about how a panel of investors (referred to as sharks) agreed to pump money into a freshly-minted idea, concept, or business.
In return, these investors demand a certain percentage of ownership or stake in the company and a profit share. The business owner raises funds as well as gains access to expertise, mentorship, relevant network groups, and more.
Besides, investors also receive advisory shares in addition to a portion of the company’s stock. This works in favor of ‘sharks’ or the investors as they are only purchasing equity instead of actual shares, which ensures there is no room for any conflict of interest in the future.
Advisory shares are an excellent incentive for industry experts to offer their business insight and expertise to startups. It benefits startups actively seeking professional guidance without spending limited company resources.
Contact us at trica to know more about the ins and outs of advisory shares. We offer a wide range of valuation services to startup owners looking to navigate the different barriers in the startup ecosystem.