The major difference between advisory shares and regular shares is that companies give advisory shares as a form of reward to experts for their technical expertise, guidance, and oversight role in a company, while regular shares are given or awarded to investors, founders, or even employees in exchange for their investment or contribution in the company.
Examples of experts who get advisory shares are legal advisors and consultants such as financial consultants, information technology consultants, etc. Accordingly, startups give stakes in the company to advisors in exchange for their invaluable time and expertise, strategic insights, experience, and network, while regular shares, on the other hand, can be bought by investors who want to have stakes in the company.
This article explores all the differences between advisory shares and equity shares. It provides a detailed breakdown of what each share entails, how they are issued, and what benefits or rights shareholders enjoy.
What are the Differences between Advisory Shares and Equity Shares?
We’d be discussing some of the differences between advisory shares and equity shares based on a couple of factors and indicators. The table below provides a summary of the differences between both share types:
- Purpose and Function
Ownership rights and entitlements associated with advisory shares can vary depending on the specific terms and conditions agreed upon between the company and the advisors. Typically, the rights and entitlements that come with advisory shares do not come with voting rights or a stake in the company’s profits.
For equity shares, shareholders get voting rights and a stake in the company’s profits and ownership. It could be either of the two privileges or just one, depending on what the company’s terms are.
- Ownership Rights
Ownership rights and entitlements associated with advisory shares can vary depending on the specific terms and conditions agreed upon between the company and the advisors. Typically, the rights and entitlements that come with advisory shares do not come with voting rights or a stake in the company’s profits.
For equity shares, shareholders get voting rights and a stake in the company’s profits and ownership. It could be either of the two privileges or just one depending on what the company’s terms are.
- Voting Rights and Decision-Making
Advisory shares typically have limited or no voting rights. The primary purpose of advisory shares is to compensate advisors for their non-financial contributions rather than grant them decision-making power.
With regular shares, shareholders have voting rights. Anyone holding equity shares has the ability to vote on matters that affect the company. These matters may include electing the board of directors, approving significant corporate actions, such as mergers or acquisitions, issuing additional shares, or making changes to the company’s articles of incorporation or bylaws.
- Dividend Entitlements
The dividend entitlements for advisory shares can vary depending on the terms outlined in the advisory agreement. In some cases, advisory shares may include dividend rights, allowing advisors to receive a portion of the company’s profits distributed as dividends. However, it is also possible for advisory shares to have no dividend entitlements. The specific arrangement depends on the agreement between the company and the advisors.
Regular equity shares typically entitle shareholders to receive dividends if the company declares them. Shareholders holding equity shares have a proportional right to participate in the company’s profits through dividends.
- Vesting and Exercising
It is less common to find regular shares issued to investors with vesting schedules but advisory shares come with vesting schedules that determine the timeframe over which advisors earn the right to their advisory shares. The conditions for vesting can vary and may be based on the completion of specific milestones, the length of the advisory relationship, or other performance-based criteria.
- Transferability and Sales Restrictions
Advisory shares often have transferability and sale restrictions, which are specified in the advisory agreement or separate shareholder agreements. These restrictions may include lock-up periods, rights of first refusal, or limitations on transferring the shares without the company’s consent.
In contrast, regular shares to investors are generally more liquid and freely transferable, with fewer restrictions, although there may still be legal or contractual limitations and disclosure requirements.
- Legal and Regulatory Considerations
When issuing advisory shares, companies need to be aware of the legal and regulatory considerations that may vary across jurisdictions. They should ensure compliance with securities laws, tax regulations, and corporate governance requirements specific to advisory shares. Seeking guidance from legal and financial advisors is crucial for navigating the legal and regulatory landscape.
Similarly, when issuing regular equity shares, companies must adhere to a range of legal and regulatory requirements. These include securities regulations, disclosure obligations, and protecting shareholder rights. Compliance with applicable laws and regulations is essential for the proper issuance, transfer, and management of regular equity shares.
In conclusion, Advisory shares differ from equity shares in that the former is a unique provision to appreciate experts for their expertise and support to the company while the latter is a means through which companies raise capital by giving equities and ownership stakes to employees and investors.
Best Practices Before Issuing Advisory Shares
Communication and Documentation are crucial in issuing advisory shares to ensure transparency, clarity, and a mutual understanding between the company and the advisors. Here’s why they are important:
- Transparency
It is important to clearly state the terms and conditions of how advisory shares work. Effective communication will ensure that advisors fully understand the provisions associated with the advisory shares they are receiving.
- Expectations
Clearly communicating the expectations, responsibilities, and scope of advisory services helps advisors understand their role in contributing to the company’s success. This clarity ensures that both parties have a shared understanding of what is expected from each other.
- Vesting Schedule
If advisory shares are subject to a vesting schedule, it is crucial to communicate the specific vesting terms, including the vesting period, milestones, or performance targets that need to be achieved for the shares to fully vest. This clarity helps advisors track their progress and understand the timeline for the potential ownership of the shares.
- Restrictions and Transferability
If there are any restrictions on the transfer or sale of advisory shares, such as lock-up periods or rights of first refusal, these should be clearly communicated. Advisors need to understand any limitations on their ability to transfer or monetize their equity in the company.
Case Studies on Advisory Shares Issued by Companies
There are a couple of companies that have effectively modeled how advisory shares are and how they should be issued. This section aims to provide further perspective for startup founders and CEOs.
- Uber
In its early stages, Uber granted advisory shares to prominent individuals in the tech and transportation industries who provided valuable advice and expertise. For instance, the company issued advisory shares to Google’s former CEO, Eric Schmidt, who served as a strategic advisor. These shares not only compensated the advisors for their contributions but also aligned their interests with Uber’s long-term success. The advisors’ involvement helped Uber navigate regulatory challenges, expand into new markets, and refine its business strategies.
- Airbnb
To gain insights and expertise in the travel and hospitality industry, Airbnb offered advisory shares to key individuals with relevant experience. For instance, Airbnb granted advisory shares to Chip Conley, a hotel industry veteran and founder of boutique hotel chain Joie de Vivre.
Conley provided strategic guidance on hospitality and guest experiences, helping Airbnb refine its offerings and expand its presence. Advisory shares incentivized Conley to actively engage with the company and share his knowledge to enhance Airbnb’s growth and reputation.
- SpaceX
SpaceX, the aerospace manufacturer and space transportation company founded by Elon Musk, has utilized advisory shares to engage experts in the field of space exploration and engineering. The company has granted advisory shares to individuals such as Hans Koenigsmann, a former NASA engineer, who played a crucial role in providing technical guidance and oversight.
By aligning the interests of these advisors with the company’s success through advisory shares, SpaceX leveraged its expertise to push the boundaries of space technology and achieve significant milestones.
- Startups on Accelerator Programs
Many startup accelerator programs, such as Y Combinator and Techstars, provide advisory shares to mentors who support and guide the participating companies. These mentors, often successful entrepreneurs, industry professionals, or investors, offer their expertise, connections, and advice to the startups.
The advisory shares recognize their contributions and create a sense of ownership in the startups’ success. By engaging advisors through advisory shares, these programs foster a collaborative ecosystem where experienced individuals actively support the growth and development of emerging companies.
FAQs
What is the benefit of advisory shares?
The major benefit of advisory shares is that they provide a way for companies to compensate external advisors or consultants for their non-financial contributions. Through this type of share, companies are able to incentivize advisors to actively contribute their expertise, industry knowledge, and networks to support the company’s growth and success.
How long do advisory shares last?
The duration of advisory shares is determined by vesting schedules or on account of an exit as outlined in the Advisory Agreements or any regulatory provision.
How many shares does an advisor get?
The amount of shares an advisor receives is determined through negotiation between the company and the advisor. There is no fixed rule or standard percentage for the equity granted to advisors.
Do advisory shares affect valuation?
Yes. Both advisory shares and regular shares affect the overall value of a company or firm. Every share is a stake of ownership or some form of financial compensation that directly or indirectly affects a company’s valuation.
Do advisory shares get diluted?
Advisory shares, like every other stock or share option suffer dilution. When new shares are issued, the value of existing shares and the stake of existing shareholders will be reduced.
Can you sell advisory shares?
No. Advisory shares cannot be sold or transferred. This is because they are given by companies as rewards to experts and not some publicly traded stock options that any retail investors can buy.