Advisory shares are one of the most common forms of equity compensation, particularly in startups and the cryptocurrency sector. They not only recognize the contributions of advisors but also create incentives for long-term commitment. So, how are advisory shares different from common shares?
1. The significance of advisory shares
Advisory shares represent an intriguing concept in the financial world. However, the term doesn’t always equate to stock options. Instead, it often refers to equity-based compensation strategies that businesses use to recognize and encourage advisors’ contributions. Two common forms associated with advisory shares are Non-Qualified Stock Options (NSOs) and Restricted Stock Agreements (RSAs).
Restricted Stock Agreements (RSAs) involve shares that are purchased upfront but come with conditions tied to a vesting schedule. This means the holder must wait for a specific period or meet certain milestones before gaining full ownership.
Non-Qualified Stock Options (NSOs) grant the holder the right to purchase the company’s shares at a predetermined price in the future.
These two forms not only provide financial benefits but also foster stronger advisor engagement with the long-term growth of the business
2. How are advisory shares used?
Advisory shares function as a smart financial tool to attract and retain strategic advisors, particularly during the early development stages of startups. Advisors contribute not only value-oriented strategies but also build critical relationships, enabling businesses to scale or access essential resources.
However, startups often face challenges in making immediate cash payments to advisors. That’s why they opt to provide equity in the form of advisory shares.
3. What are the benefits of issuing advisory shares?
When advisors receive advisory shares, their interests are directly tied to the company’s success. This alignment motivates them to actively support and create long-term value for the business. Notably, if a company has an advisory board, allocating shares encourages members to focus on collective benefits.
Advisory shares are an efficient way to balance interests between the company and its advisors. Instead of immediate cash payments, advisors receive stock options, incentivizing them to work toward long-term goals.
Collaborating with a renowned expert or industry influencer can elevate the company’s standing and credibility. This not only enhances the brand’s image with customers but also makes it more appealing to investors.
Advisory stock options typically come with a vesting period of 1 to 2 years. This mechanism ensures sustained engagement and contributions from advisors throughout the partnership.
4. Risks of issuing advisory shares
4.1. Share dilution
Issuing advisory shares reduces the ownership percentage of existing shareholders. If overused, this can lead to a loss of control and a decrease in the value of each share, potentially destabilizing the company.
4.2. Risk of overcompensation
Granting advisory shares exceeding the value provided by advisors can create financial strain and reduce business efficiency. Companies must accurately assess the advisor’s contributions to implement fair compensation policies and avoid unnecessary expenses.
4.3. Potential conflicts of interest
Some advisors may simultaneously work for competitors, increasing the risk of sensitive information leaks. To mitigate this risk, companies should implement strict confidentiality agreements and thoroughly evaluate potential advisors’ affiliations before granting shares.
5. Are advisory shares the same as common shares?
In essence, advisory shares are not entirely the same as common shares, although both represent a portion of a company’s equity. The primary difference lies in the method and purpose of allocation.
Advisory shares are typically provided in the form of stock options. The holder of the option has the right to purchase shares at a predetermined price, usually lower than the market price at the time of purchase. Once the option is exercised, the holder owns shares that represent a portion of the company’s equity. Therefore, advisory shares are considered a form of equity compensation, encouraging advisors to actively contribute to the business’s development.
In the cryptocurrency sector, advisory shares have a unique application: instead of offering equity, startups often grant a portion of the tokens they issue. These tokens may represent access to products, services, or financial benefits within the blockchain ecosystem. This not only acknowledges the advisor’s role in strategy development and investor connections but also opens opportunities for deeper involvement in the project.
Despite the differences, both advisory shares and common shares play crucial roles in business development, aligning with the needs and conditions of each party involved.
Advisory shares offer mutual benefits, helping companies optimize their resources while giving advisors a chance to participate in the company’s success. While different from common shares, both types of shares carry significant value in business growth, with this flexibility being especially relevant in today’s economic landscape.
