In this article, we’re answering “What are advisory shares?
This will include a detailed breakdown of advisory shares along with explanations of the most important factors impacting them.
Additionally, we’re going to answer the most common questions we get asked from our members about advisory shares in start-up businesses.
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Feel free to use the table of contents to jump ahead to the sections most relevant to you.
Table of Contents
- What Are Advisory Shares?
- Regular Shares vs Advisory Shares
- Frequently Asked Questions
- Ready to Open Accounts With Banks in the USA?
What Are Advisory Shares?
Advisory shares refer to equity compensation, usually startup equity, earned by Advisory Board members (and other advisors) in early-stage businesses. There are generally restrictions on the equity stake issued to advisors and dilution should be carefully considered.
In short, advisory shares are similar to the share-based compensation and employee stock options provided to other individuals in a startup. As a result, some restrictions apply to the timing and sale of shares.
Restricted shares, or restricted stock units (RSUs), that are received as stock-based incentives or through a stock options plan typically face a vesting period. This means that certain milestones, deliverables, or timelines need to be met before the shares are issued to the advisor.
The specific mechanism for issuing advisory stock can vary, including stock grants or direct issuance. However, other mechanisms like convertible notes are generally reserved for angel investors and other purposes.
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When Are Advisory Shares Used?
Advisory shares are used when a business wants to attract the expertise, skills, knowledge, guidance, or network of an individual who is not a formal employee in a company.
By accepting advisory shares, the advisory is indicating that they believe in the potential of the company and wish to receive equity compensation in exchange for their participation as an advisor.
How Are Advisory Shares Taxed?
Advisory shares will be taxed based on a number of factors. The most important factor for tax considerations is the jurisdiction or jurisdictions. Additionally, other tax considerations include earning the shares, selling the shares, vesting the shares, and more.
If you are considering advisory shares as part of a compensation plan and want to understand the tax implications of receiving them, you should speak with a qualified tax advisor who can help you on this matter.
Regular Shares vs Advisor Shares
The main difference between regular shares and advisory shares is that regular shares indicate ownership and a higher degree of responsibility while advisory shares generally indicate certain rights and responsibilities associated with services provided.
Additionally, depending on the stage of the business, regular shares can be bought and sold via public markets while advisory shares are a form of equity compensation in exchange for specific contributions to a business.
Lastly, regular shares can be both restricted and unrestricted, depending on the stage of the business and the method the shares were obtained. However, advisory stocks typically have restrictions in place related to vesting periods and transfer restrictions.
Are Regular Shares Common Stock Units?
Yes, regular shares are common stock units, which are the most basic form of stock in a company. Common stock is what founders, investors, and employees receive in a company whether they start the company, invest in the company, or receive stock as part of their compensation package.
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Frequently Asked Questions
Below are four of the most common questions we receive from people looking into this topic are. If you have further questions you would like to ask our team, don’t hesitate to get in touch.
Who Gives Out Advisory Shares?
Advisory shares are generally given out by startups looking to leverage their growth potential. In doing so, they want to attract advisors. In doing so, these companies can benefit from the skills, expertise, knowledge, and networks of advisors in a particular industry or area of interest.
What Is Meant By Advisory Shares?
Advisory shares refer to equity compensation in an early stage company in exchange for their participation as an advisor to the business. In most cases, advisors possess a certain skill or area of knowledge that the startup wants to obtain in order to help them achieve their objectives.
What Is the Difference Between Equity Shares and Advisory Shares?
The main difference between equity shares and advisory shares is that equity shares refer to ownership in a company and typically have a higher degree of responsibility, while advisory shares refer to equity compensation for specific deliverables.
What Are Advisory Shares Worth?
The value of the underlying company determines the value of advisory shares. This is the same when it comes to any shares. That said, because the shares are in startup companies, the true value of the shares may not unlock for many years.
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