venture capital

Startup Equity Guide: What Are The Differences Between Regular And Advisory Shares?

PEL admin

Mar 8, 2024 • 9 min read

When it comes to startups and equity compensation, a common question arises: What is the best way to incentivize advisors and compensate stakeholders? Advisory shares and equity shares are two types of ownership rights that hold the answer. But which one truly holds the key to startup success?

In this article, we will unravel the differences between advisory shares and equity shares, exploring how they impact equity compensation and advisor incentives. So, if you're ready to gain a deeper understanding of these ownership rights and discover the secrets to building a successful startup, read on.

Key Takeaways:

Advisory shares and equity shares are ownership rights used by startups to incentivize advisors and compensate stakeholders.
Advisory shares are given to experts in exchange for their guidance and expertise, while equity shares are awarded to investors and employees.
The key differences between advisory shares and equity shares lie in stakeholder rights, voting rights, eligibility criteria, and transferability.
Both types of shares have their benefits and considerations, including the ability to provide financial benefits through dividends and the opportunity for shareholders to sell shares for a profit.
Real-life examples such as Uber, Airbnb, and SpaceX showcase the successful utilization of advisory shares in engaging and incentivizing startup advisors.

What are Advisory Shares and Equity Shares?

Advisory shares, also known as stock options, are provided to advisors as a form of compensation for their non-financial contributions to the company. These shares operate similarly to regular shares, offering shareholders special rights and privileges.

Equity shares, also known as regular shares or common stock, represent ownership in a company and come with voting rights and a stake in the company's profits. They provide shareholders with ownership rights, allowing them to participate in important company decisions.

Both advisory shares and equity shares can provide financial benefits to shareholders. Advisory shares allow advisors to share in the company's success through dividends and the opportunity to sell their shares at a profit. Equity shares, on the other hand, offer regular shareholders the chance to receive dividends and benefit from the company's value appreciation over time.

Key Differences Between Regular and Advisory Shares

Advisory shares and equity shares have several key differences that distinguish them in terms of stakeholder rights, voting rights, eligibility criteria, and issuance.

Voting Rights

One of the primary differences between advisory shares and equity shares is the presence of voting rights. Equity shares provide shareholders with the ability to vote on important company decisions, ensuring their voices are heard in matters that directly impact the organization. On the other hand, advisory shares do not come with voting rights, as their purpose is to reward advisors for their non-financial contributions rather than granting them decision-making power.

Eligibility Criteria

The eligibility criteria for receiving advisory shares and equity shares also differ. Equity shares, also known as regular shares or common stock, are more readily available to individuals such as investors and employees. Anyone who meets the requirements can purchase or be awarded equity shares. In contrast, advisory shares are typically given to experienced executives and key personnel who provide valuable guidance and expertise to the company. The criteria for granting advisory shares are often more selective and based on the individual's specific industry knowledge and track record.

Issuance of Shares

Another significant difference lies in the companies that offer advisory shares and equity shares. Publicly traded companies primarily issue equity shares, which are made available to investors on stock exchanges. These shares can be freely traded and bought by anyone who meets the eligibility criteria. Startups, on the other hand, often award advisory shares to advisors as a form of compensation or incentive instead of cash payments. Advisory shares are typically not publicly traded and are not available to the general public.

Aspect	Advisory Shares	Equity Shares
Voting Rights	No voting rights	With voting rights
Eligibility Criteria	Given to experienced executives and key personnel	Available to investors and employees
Issuance	Not publicly traded	Traded on stock exchanges

From the table above, it is clear that advisory shares and equity shares have distinct characteristics in terms of voting rights, eligibility criteria, and the companies that offer them. Companies must carefully consider these differences when determining which type of shares to offer and to whom.

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How Advisory Shares and Equity Shares are Issued

Advisory shares and equity shares follow different processes for issuance, each with its own unique characteristics and requirements.

Advisory Shares:

When it comes to advisory shares, companies often implement a vesting schedule. This schedule outlines the timeframe over which advisors earn the right to their shares based on their continued service to the company. By structuring shares with a vesting schedule, companies ensure that advisors are committed and actively contributing to the company's success.

Advisory shares also usually come with certain transferability and sale restrictions. These restrictions are carefully outlined in the advisory agreement, ensuring that the shares are not easily transferred or sold without meeting specific conditions. By implementing transferability and sale restrictions, companies protect the integrity of their advisory share programs and maintain control over the ownership structure.

Equity Shares:

Equity shares, on the other hand, are generally more freely transferable compared to advisory shares. While there may still be legal and contractual limitations on the transfer of equity shares, they offer greater flexibility in terms of buying, selling, and transferring ownership. This allows equity shareholders to easily navigate the secondary market or transfer their shares to other parties as needed, subject to compliance with applicable laws and regulations.

Both advisory shares and equity shares require companies to comply with legal and regulatory requirements. This ensures that the issuance of shares aligns with relevant securities laws and other regulations governing equity ownership. By adhering to these requirements, companies can protect the rights of their shareholders and maintain transparency in the issuance and management of shares.

Benefits and Considerations of Advisory Shares

Advisory shares offer numerous benefits to both companies and advisors involved. This form of equity compensation serves as a powerful incentive for advisors to actively contribute their expertise and guidance to the company. By providing advisors with a stake in the company's success, advisory shares align their interests with those of the company, fostering a collaborative and mutually beneficial relationship.

For companies, advisory shares present a compelling compensation structure that allows them to reward advisors without depleting their cash reserves. This is particularly advantageous for startups and emerging companies that may not have significant financial resources. Offering advisory shares as part of an equity compensation package not only motivates advisors, but also conserves capital that can be reinvested in the business's growth and development.

However, it's essential for companies issuing advisory shares to be aware of the legal and regulatory considerations involved. Compliance with securities laws and tax regulations is crucial to avoid potential legal consequences. The issuance of advisory shares must adhere to applicable regulations, ensuring that the company and the recipients are in adherence to the law.

Overall, advisory shares serve as a strategic tool for companies to attract and retain experienced advisors, while providing valuable incentives for these individuals to contribute their expert guidance and support. By carefully navigating the legal and regulatory landscape, companies can leverage advisory shares to foster strong relationships with advisors and drive the success of their business.

Benefits of Advisory Shares	Considerations for Issuing Advisory Shares
Equity compensation incentivizes advisors Aligns advisor's interests with the company Conserves company's cash reserves Encourages collaborative relationship	Compliance with securities laws Adherence to tax regulations Legal consequences for non-compliance

Real-Life Examples of Advisory Shares in Action

Several successful companies have effectively utilized advisory shares to engage and incentivize startup advisors. These examples highlight how advisory shares play a crucial role in attracting top talent and leveraging expert insights.

1. Uber

Uber, the ride-hailing giant, has granted advisory shares to industry experts as part of their compensation package. By offering equity compensation, Uber encourages advisors to provide their guidance and expertise in navigating regulatory challenges and expanding into new markets. These shares not only align the interests of advisors with the company's success but also serve as a powerful incentive for their continued involvement.

2. Airbnb

Another notable example is Airbnb, the online marketplace for lodging and vacation rentals. Airbnb has awarded advisory shares to key individuals with relevant experience in the travel and hospitality industry. This strategic move not only acknowledges the value of their expertise but also strengthens the company's relationship with industry insiders. Advisory shares provide a tangible stake in the company's success, driving advisors to actively contribute to Airbnb's growth and innovation.

3. SpaceX

SpaceX, the aerospace manufacturer and space transportation company, has utilized advisory shares to engage experts in space exploration and engineering. By granting these shares, SpaceX leverages the knowledge and insights of industry leaders to achieve significant milestones. The opportunity to be part of such groundbreaking projects through equity compensation motivates advisors to contribute their expertise and support SpaceX's mission.

4. Startup Accelerator Programs

In addition to individual companies, startup accelerator programs commonly utilize advisory shares to compensate mentors who provide guidance and support to participating companies. These programs understand the value of connecting experienced advisors with startups and offer advisory shares as both a recognition of expertise and an incentive for mentorship. Through the equity compensation, mentors are more invested in the success of the companies they guide.

Company	Industry	Advisory Share Recipients	Purpose
Uber	Ride-hailing	Industry experts	Navigating regulations, expanding into new markets
Airbnb	Travel and hospitality	Experienced individuals	Industry insights, innovation
SpaceX	Aerospace	Space exploration and engineering experts	Significant milestones, innovation
Startup Accelerator Programs	Various industries	Mentors	Guidance and support to participating companies

Before you go..

Peeling back the layers on the differences between advisory shares and equity shares has given us a clearer understanding of how startups can effectively incentivize advisors and compensate stakeholders. By highlighting the unique roles and benefits of each type of share, we've seen how pivotal they are in building a successful startup foundation.

But the exploration of startup success strategies doesn't stop here. With the business landscape ever-evolving and startups continually innovating to stay ahead, there's a wealth of knowledge still to uncover. Whether it's delving deeper into equity structures or discovering new ways to engage and reward team members, the journey into the startup world is filled with insights waiting to be discovered.

So, keep that curiosity burning and continue to explore. Dive into more articles and resources that shed light on the mechanisms of startups and private equity. Each piece of knowledge not only enriches your understanding but also equips you with the tools to navigate the complexities of startup growth and investment. Remember, every bit of learning is a step towards mastering the art of startup success.

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FAQ

What are advisory shares and how do they differ from regular equity shares?

Advisory shares are a type of equity granted to advisors or consultants of a company in exchange for their advisory services. The key difference between advisory shares and regular equity shares lies in the terms of the agreement and the vesting schedule.

How are advisory shares granted and how much equity do advisors typically receive?

Advisory shares are typically granted to advisors through an advisory agreement. The amount of equity that advisors receive can vary depending on the agreement and the value of their services to the company.

What are the pros of issuing advisory shares for a company?

Issuing advisory shares can be beneficial for a company as it allows them to attract experienced advisors without having to pay cash salaries. It also aligns the advisors' interests with the company's success.

What are the cons of issuing advisory shares?

Some cons of issuing advisory shares include potential dilution of company equity, complexities in managing multiple shareholders, and challenges in handling disputes or disagreements with advisors.

What is a vesting schedule and how does it apply to advisory shares?

A vesting schedule determines when advisors receive full ownership of their advisory shares. It typically involves a set timeframe during which the shares gradually "vest" or become fully owned by the advisor.

How do advisory shares work in comparison to employee stock options?

Advisory shares are typically granted to external advisors or consultants, while employee stock options are given to employees of the company. Advisory shares may have different terms and conditions compared to employee stock options.

Can founders also receive advisory shares in addition to regular equity shares?

Yes, founders of a company can also receive advisory shares in addition to their regular equity shares. This can be a way to incentivize and reward founders for their ongoing contribution to the company.