Advisory shares, also known as advisor shares, are stock options issued to company advisors in exchange for their advice and expertise. Advisors who receive advisory shares are usually businesspeople with previous experience as company founders or senior executives.

In this beginner’s guide, we will explore the concept of advisory shares, their benefits, and how they work. By the end of this guide, you will have a better understanding of what to expect when dealing with advisory shares. So, let’s get started!

What are advisory shares?

Advisory shares allow holder to buy a company’s stock at a set price in the future, much like stock options. However, they usually come with fewer benefits than regular stock options.

With advisory shares, the holder usually does not get voting rights or the right to dividends like normal shareholders. They are simply meant to motivate and reward advisors by letting them own a piece of the company.

An advisor and startup will agree on details like the number of advisory shares granted, the purchase price per share, and the schedule for when the shares can be purchased. Once the agreement is signed, the advisor can buy the shares at the set price whenever allowed by the vesting schedule.

Although the advisor with advisory shares does technically own part of the company, they typically cannot vote or receive dividend payments like regular shareholders. However, the advisory shares still represent potential future value if the company succeeds. So they function mostly as an incentive for advisors to help the startup grow.

Who receives advisory shares?

Advisory shares are typically offered to advisors with industry experience or expertise who can provide guidance to help the startup succeed. This includes veteran entrepreneurs, subject matter experts or well-connected individuals willing to mentor the startup.

To earn advisory shares, one must demonstrate to the startup the value that could be added. Be prepared to share relevant experience, skills, connections or advice that can help the company achieve key milestones. 

Come equipped with a proposal outlining what would be offered and what would be wanted in return like a specific number of shares at a given price. Startups are more likely to grant advisory shares to those who can help them in a meaningful, targeted way.

How do advisory shares work?

Advisory shares are a way for companies to compensate advisors. The company and advisor agree on the terms and conditions under which the advisor can buy a set number of shares.

These shares are special – they don’t get voting rights or dividends like normal shares. But, they still represent ownership in the company. If the company does well over time and increases in value, then those advisory shares become more valuable since they now represent a bigger piece of a more valuable pie.

The advisor can then sell the shares for a profit. So advisory shares offer advisors a way to share in the potential future upside of the company they are advising.

Also Read: 7 Essential Tips On Managing Cash Flow As A Startup

Advantages of advisory shares

First, you get advice from people who know your industry inside and out. When an advisor owns a piece of your business, they’re invested in your success literally and figuratively. They’ll be motivated to use their network, experience, and skills to help you grow, find customers, raise funding, and make smart strategy decisions. Advisors with shares basically become part of your unofficial founding team, working hard to help ensure you succeed so their own shares are worth something someday!

Second, advisory shares can help attract and keep top talent. Advisors are more committed when they have a stake in the company’s success. This helps startups attract and keep the best advisors in their field.

Third, advisory shares help align the interests of advisors with the startup’s interests. Advisors who own shares want to see the company succeed to increase the value of their shares. This helps ensure the advisor’s advice and recommendations are in the startup’s best interest.

Disadvantages of advisory shares

While offering advisory shares can have its benefits, there are also some drawbacks to consider. For one, it can dilute the ownership of the startup’s founders and early employees. This can be a problem if the startup isn’t profitable yet and needs to raise more capital.

Another issue is that advisory shares can be tricky to manage. The startup has to keep track of each advisor’s vesting schedule and make sure they aren’t granted more shares than they should be. They also have to keep track of each advisor’s exercise rights so they can purchase their shares when they vest.

Finally, advisory shares can create conflicts of interest. Advisors may have interests that compete with those of the startup. For instance, an advisor who is also an investor in a competing company may not be able to give unbiased advice to the startup.

Example of a startup that has used advisory shares

One example of a startup that benefited from advisory shares is Facebook. Mark Zuckerberg’s decision to bring on entrepreneur Sean Parker as an advisor, giving him advisory shares as compensation, played an important role in Facebook’s early success story.

Sean Parker’s expertise and industry connections contributed tremendously to the company’s growth in those crucial early days. His guidance and network helped Facebook gain recognition and rise meteorically in the tech world. Giving Sean advisory shares turned out to be a smart move that paid off for Facebook.

Conclusion

In conclusion, offering advisory shares can be an effective way for companies to attract and retain top advisors. This form of compensation provides an alternative to cash payments and can be particularly beneficial for startups with limited funds. Understanding how advisor shares work and their benefits can help companies make informed decisions about their use.