Advisor Shares in a Startup – A Complete Guide
In this article, you will find out more about Advisory shares.
This article is a complete guide to advisory shares. It’s packed with knowledge, advice, and information on the benefits of taking an advisor’s shares in the startup. Advisory shares are given to the company’s advisor in exchange for their advice. In this article, you will find out more about Advisory shares.
Advisor shares in startups
Are you interested in becoming an entrepreneur and starting your own business? Advisory shares are one option that may be worth considering, especially if you are looking to start a company and want guidance and mentorship from a successful business leader in return for offering stock options. Read on to find out more about advisory shares.
What are advisor shares
Advisor shares are equity given to a business advisor in exchange for their advice and skill. They can be issued to startup consultants in place of cash compensation. Advisory shares are often given to business mentors and general business advisors. It ensures the business is taken care of, and the advisors can share the company’s success if it goes well.
Types of advisors in startups
Business advisors are people who advise companies on a strategic level. They are typical businessmen who have been successful and can lend their expert advice to the company. Business advisors can come in two forms:
- The name advisor – This type of advisor is someone who has been successful in their previous business ventures or worked with and for big companies. Their name and experience give credibility and power to the company. This type of advisor provides more stability and security for the company.
- The practical advisor – This type of advisor is typically a business coach or entrepreneur who has started several companies and worked many jobs throughout their career. They have a wide range of experience in many different fields, which gives them more knowledge about different aspects and areas in a business, which helps both the advisor and the entrepreneur when they come together to create the business.
Types of Advisor Shares
Advisory shares are equity issued in return for their advice. Here are two types of advisory shares that are commonly given out:
- Restricted stock agreement – This type of stock is given to advisors as payment for their expertise and guidance. The advisor may have a certain number of shares that they can sell on the market at their discretion. However, the advisor must agree not to sell their shares over the agreed-upon number. In simple words, they are restricted to how many shares they can sell during that period.
- Non-qualified stock option – Non-qualified stock options give employees the right to purchase a specified number of shares in their company at a preset price for a specified time.
Difference between advisor shares and regular shares
The biggest difference is that advisor shares are only issued in return for their guidance and input, whereas regular equity shares have no relation to any work other than ownership. It is also important to note that regular equity shares are issued in exchange for money, whereas these shares are issued for services. This means that regular shares are acquired through a stock sale, whereas advisor shares are acquired through services or assets. Here are a few key differences of advisor shares vs equity:
- Regular shares are sold on the market, whereas advisor shares are restricted to a certain amount of shares or time.
- Regular shares can be owned by anyone, whereas these shares are only owned by people who get it in return for their services.
- Regular shareholders can profit both from the company’s success and its failure, whereas advisor shareholders let the company succeed before profiting themselves on their stock options.
How do advisory shares work?
The company gives advisor shares to business advisors, who then use them to motivate and encourage both the company and its employees. The advisors can also profit from the shares, but there is an agreement between them and the company that they will not sell their shares within a certain time limit. A vesting period for advisor shares is typically monthly without any cliff. Furthermore, advisors may have the right to sell their stock before or after the agreed-upon expiration date.
Who receives advisory shares and how much?
Advisers can receive an advisor share based on their relationship with the company and their experience. They are usually issued when a company is getting started and needs preliminary guidance from a good business advisor. When the company’s business is established, the advisor’s stock will vest over time. The amount of the advisor share depends on several factors:
- The amount of time that has passed, and the progress of the company
- The level of expertise and guidance provided by the advisor to the company
- The level of risk the company is exposed to
- The equity plan for the company
Usually, the deal involves an agreement regarding the vested number of shares, the amount of the shares to be issued, and when they will be issued.
Who issues advisory shares?
Advisor shares are issued by the board of directors of a company. They issue this type of stock because they want to acknowledge the efforts of business advisors and leaders, giving them a chance to share in the company’s success. The holders of advisory shares are not shareholders, so they do not have any right to nominate or veto management decisions such as appointing new board members. Therefore, advisory shares are mainly issued to motivate the advisor and the company.
Example of advisor shares
Assume that a company is currently in the process of starting up. The business owner and some other key executives have hired a few business advisors to help them develop their business. The company may give 0.10% of equity to an advisor who attends monthly meetings. The 0.10% is a small percentage of the equity, but it can grow over time as its value increases. Thus, the advisor is motivated to participate and help the company grow.
Pros and cons of advisor shares
Advisory shares can provide numerous benefits as well as some negatives. Following are a few pros and cons of using them:
- Advisor shares can encourage businesses and advisors to start working together.
- These shares help companies develop by giving them access to key business advisors in the early stages of their development.
- These shares can be structured to give advisors profits as soon as they vest instead of having them wait until several years have passed before profiting from their investment in the company.
- This is the best alternative for companies that do not have enough money to pay business advisors for their services.
- These shares make the advisor more invested in its success and more willing to help it become successful.
- There is no way of ensuring that advisors will not profit from the sale of their shares before they vest due to high stock volatility or other factors outside of their control.
- Business advisors may give advice based on how they stand to profit rather than on how they think will be best for the company’s growth and development.
- These shares can promote conflicts of interest between the company’s officers and advisors.
- It is difficult for a company to change the vesting schedule to give out more shares or fewer shares to advisors, so the vesting schedule must be set up accurately from the beginning.
- Companies can run into problems with owning too many advisor shares.
How to approach advisors for conversion about equity?
Now that you know what advisory shares are, how they work, and what they can do, it’s time to find ‘how to approach advisors for conversion about equity?’ The ever-changing and fluctuating economy makes it hard to predict the future. It is important to have business advisors who can help you take advantage of the changes in the business environment. However, approaching business advisors for their support can be a bit challenging. Therefore, some ideas will help you approach advisors for conversion about equity and make them work for your company.
- Referrals – The most common way of approaching business advisors is through your previous clients or customers. If you have worked with them before, they will probably know a good business advisor. Furthermore, if you want to discuss converting their shares into equity without giving them a share in the company, you can discuss it with them as well.
- Trade Shows – Another way of approaching business advisors is through trade shows. Businesses often use these to promote their products and services. Therefore, you can attend the shows used by the business advisors that you’d like to convert. Showing your face at these events will open many doors for you, so it is worth it to put some effort into it.
- Social networks – Social networks have become a powerful marketing tool, and they can help you build relationships with business advisors and their clients. You can see what type of clients and business advisors these people have, which will give you an idea of the type of work they do.
- Online networking – While networking via social media sites is not as effective as traditional networking, it does give you a chance to interact with the people you’d like to convert about equity. Online networking is not just limited to social media sites such as Facebook. No matter where you live, there is a good chance that you can find business advisors on LinkedIn, Twitter, and various other social media sites.
These are a few ideas that might help you approach other business advisors for conversion about equity.
Things to keep in mind while issuing advisor shares
Businesses should always remember that these shares can lead to conflicts of interest. Moreover, they can also pose a risk to the company if the shares have low value. Following are some strategies that businesses can implement to avoid issues with these types of shares:
- Equity offerings based on advisors’ roles and time commitments are essential for business owners to ensure that advisors are properly compensated for their time. Based on the role of each advisor, businesses can decide how much equity they will offer them after the conversion of the associate’s shares. The higher the role and time commitment of an advisor, the more equity they will receive.
- Prepare company confidentiality, and intellectual property agreements – Businesses should also ensure that confidentiality agreements are in place between the company and its advisors. This way, the company can ensure that it will not have any issues with its advisors revealing confidential information about the business or serving as an advisor without receiving an equity threshold.
Manage your startup equity for advisors with Eqvista!
Advisor shares can be a lucrative investment for business advisors. However, businesses should thoroughly evaluate the circumstances before issuing these shares to their business advisors. If you want advice on approaching advisors for conversion about equity, please do not hesitate to inquire with Eqvista. We will be happy to help you manage your startup with advisor shares.