Advisory shares vs equity: Which Path to Offer?

Companies offer various incentives to save budgets and attract talent in the rapidly expanding world of startups. Newly established startups rely on industry experts for valuable insight into business expansion. Instead of offering pecuniary remuneration, early-bird startups offer advisory shares or equity to veterans for their services. This article explores the benefits of advisory shares vs equity from a startup’s perspective.

What are Advisory Shares?

Advisory shares are a specific form of non-cash equity compensation offered to advisors/experts for their services to a company. Advisory shares come with a stock option, meaning the advisor has the right to buy the shares of a specific company at a set value in the future, hence providing a lot of flexibility for the companies. Advisory shares are not regular shares; they come with certain terms and conditions to benefit startups.  

• Holders of advisory shares do not have any say in the company’s decision-making; rather, advisors must contend with an observer role while shareholders actively participate in decision-making.
• Advisor shares do not grant immediate right of possession and dividends until the company reaches a certain point. Ownership transfers gradually over time, according to the advisory agreement. This provides a cushion for a company.

What benefits do Advisory Shares offer to companies?

Advisory shares offer opportunities for both parties but are overwhelming from a company’s perspective.

1. Attracts talent; new companies seek expert guidelines to grow their business. Moreover, new startups do not have extra funds to hire experts. Therefore, advisory shares are good options for paying experts. This is both a cost-effective and a viable option for companies in their infancy.   
2. Motivates advisors, and the hope of ownership creates interest and encourages advisors to invest in the company’s success. This enables companies to extract the maximum from an expert because of his devotion to the company’s cause.
3. Increases a company’s creditability; advisors are industry experts and have good contacts with creditors, who can be utilized to arrange credit. Early-stage startups require credit for meeting operational and marketing expenses. 
4. Aligns the interests of both; advisors and the company both benefit from the company’s growth. Ownership of both parties creates an environment of setting common interests and striving to achieve them.

Downsides of Offering Advisory Shares:

Advisory shares look like a promising option for companies to attract talent, but they still require meticulous thinking and calculation while offering. Following are some of the disadvantages of advisory shares:

Dilution of Equities

Although advisory shares are limited in number, they have an impact on a company’s overall stock. The owner of a company must calculate the amount of support they get from advisors and the amount of dilution; a perfect balance is required.

Limited Involvement of Advisors

Advisors only extend strategic value to a business, they do not involve 24/7 like owners or employees, this lead to limited commitment towards the company. Moreover, sometime goals of a company and advisors do not converge which lead to conflicts.

How to Optimize the Potential of an Advisor?

Only the optimal use of advisory shares ensures the growth of a company. Dropbox and Airbnb are perfect examples of the success of advisory shares. Zirtual is the epitome of how the over dilution of equity through advisory shares has brought disaster to the company. Following are the steps to ensure for managing advisory shares:

• Uninterrupted communication is a cornerstone among stakeholders. A company must ensure regular communication with its advisory shareholders, especially in matters pertaining to strategic value.
• A company should evaluate the profile of an expert before offering advisory shares. Setting clear expectations from an advisor according to his area of expertise, ensuring his time and level of commitment will set common goals.
• Regular reviews and adjustments are the best way to self-evaluate. The potential benefits of the advisor’s role, contributions, and commitment must be evaluated periodically. This will refine unwanted advisors and save crucial equity.
• Read case studies of successful ventures which used advisory shares to bring success to their startups. Try to learn how they have managed it and try to implement those strategies.

What are Equities?

Equities are commonly termed stocks or shares; a shareholder owns a portion of a company through proportional shareholding. Equities enable a holder to enjoy all the aspects of ownership, including profit-loss sharing, decision-making, etc.

What benefits does equity sharing offer companies?

Offering equities to experts seems a less rational decision; however, it still has enough offerings for companies due to the cash-strained early stages of startups.

1. It provides alternate paying options for companies; hiring experts for a salary seems a costly option in the early stages.
2. It aligns with both options’ goals; both options achieve this goal; however, advisory shares are more viable from a company’s perspective.

Note: Positive aspects of advisory shares and equities are similar to a certain extent.

What to Opt in Advisory Shares Vs Equity?

As mentioned above, advisory shares and equity both offer alternate ways of paying your experts/attracting talent for their invaluable input. If you run an early-stage startup, you should offer advisory shares to the experts. And if you are an advisor working for a company, you should demand equity instead of advisory shares.

Bottom Line

In a nutshell, advisory shares and equity are great tools for attracting talent, especially industry experts. Although both have many common features, understanding the underlying difference enables young entrepreneurs to capitalize on the experience of specialists to smoothly navigate the challenges at the early stages of startups and save crucial equity. Only the optimum usage of advisory shares ensures a successful partnership with an expert.