A type of stock option provided to company advisors in exchange for expert and strategic insights. Also referred to as advisor shares, and are seen as a financial reward for the success of an organization.
Advisory Shares Details
Advisory shares allow a company to delay the transfer of ownership to business advisors. They provide an incentive to advisors to contribute to the long-term success of the organization. A highly successful company has a higher stock value which is financially rewarding for business advisors.
A newly formed company should hire a business advisor and provide them advisory share options when they want technical advice from an experienced professional. This helps companies keep their business secrets intact and, at the same time, incentivize the advisor to focus on the long-term success of the company. Advisors can be beneficial as they possess alliances with highly influential professionals working in several domains. These highly informed and creative minds can be massively effective for a company, especially a startup.
A company that accumulates several business advisors can set up an advisory board. This board of highly influential professionals syncs up every month, quarter, or year to discuss the company's growth. These advisors combine their years of expertise to come up with strategic business solutions for the organization. Advisory shares help to align these individuals and motivate them to strive for the success of the company.
Real-World Example of Advisory Shares
Experion Technologies is an expert in providing strategic business insights for startups all over the world. They have strong expertise in agile development, which helps transform startup ideas into market redefining products. To date, they have helped nearly 80 startups in bringing their solutions to the forefront.
Significance of Advisory Shares
A startup organization uses advisory shares to onboard highly skilled professionals with years of experience. This helps the company during the critical stages of development. Business advisors sign confidentiality and non-disclosure agreements to safeguard the company's business secrets. An advisor might be working with several companies, which may create a conflict of interest.
Founders of a startup organization find it easy to give away a small percentage of equity in a newly founded company with few assets in exchange for strategic expertise. However, in some cases, even experienced business leaders might not make good advisors. Some advisory share agreements have a trial period that ensures that the company can terminate the stock deal during the trial period without any stock options being transferred to the advisor.
There is no fixed standard for the percentage of shares offered to business advisors. A typical advisory share ranges from 0.25% to 1% vested for 1 or 2 years. In some cases, the percentage of advisory shares could be higher or lower and vested over longer or shorter time durations. The scale, valuation, and backing of a company indicate the percentage of advisory shares offered.
Advisory Shares vs. Regular Shares
Regular shares or just shares are units of stock representing fractional ownership in the company. An individual holding shares in a company is entitled to the company's profits, parts of the assets, and liabilities. However, the individual and the company are separate legal entities. If the company goes bankrupt, the personal assets of the individual remain affected.
On the other hand, advisory shares are for experienced business advisors by a company in exchange for strategic business insights. This helps the investors align with the company's goals. A successful organization with a high market share is financially rewarding for business advisors.