Ever held a dollar bill and wondered about its many forms? In the startup world, that bill represents 'equity'. It's the lifeblood of young companies.
While they trade it for crucial funds from investors, they also use a unique version of it, known as 'advisory shares', to rope in industry expertise. But wait, aren't they both slices of the company pie? Yes, but one might just have some cherry toppings!
If you're puzzled by these terms - equity and advisory shares - and curious about how they differ, you're in the right place.
Here is our guide for early startups regarding advisory shares and equity, offering clarity, insights, and best practices to maximize growth and collaboration:
Advisory Shares: Compensation for Expertise
Advisory shares are like little thank-you gifts that startups give to experts. Imagine you're great at something and a new company asks for your advice.
They don’t hand you cash for it. Instead, they give you these advisory shares, tiny parts of their company, as a nod for your wisdom. Your reward? If the company grows and becomes a big deal, your tiny part, those shares, could become worth quite a bit!
So, it’s a nifty way for smart minds to help fresh companies, with the hope that those little thank-you notes become valuable someday!
Equity: Ownership with Financial Stake
Equity is like owning a small part of a startup. Let's say you have some money to invest and you find a startup you really believe in. You give them your money, and in return, they give you equity, a little ownership in their company.
It’s like planting a money tree, hoping it will grow and give you more money in return! This is a tad different from advisory shares. While equity involves putting your money into a startup, advisory shares are more about putting in your wisdom.
You’re sharing your knowledge with the startup, hoping that the slice of the company they give you as thanks will become valuable as they grow. It’s a gamble, but one with potentially high rewards!
8 Key Differences between Advisory Shares and Equity Shares
Ever wondered how advisory shares and equity shares differ? Well, here are 10 key differences that set them apart.
Let's dive in and uncover what makes each unique, shall we?
1. Right to Ownership
Ownership! It's a word that pops up often when we chat about companies. When you hear "equity," think of it like getting a seat at the big table. You're part-owner, can vote on stuff, and even get a slice of the profit pie.
Now, advisory shares? That's a tad different. Imagine them as special passes for the experts who give advice to the startup. They don’t usually get to vote or share in profits.
Plus, these shares don’t just land in the advisor’s lap! They're earned gradually over time, ensuring that the advisor sticks around and the startup continues to benefit from their expertise. It’s a slow, steady, and strategic journey to value for both!
2. Voting Rights and Decision-making
Equity shares mean you get a say in big company decisions. Like, choosing the team leaders or agreeing on major moves. It's your chance to shape the company's journey.
On the flip side, advisory shares are different. Those who hold them give smart advice to the company, but they usually don't vote on those big decisions.
Think of it like being in a team where you give ideas but don't make the final call.
So, while equity share owners might vote on big changes or leaders, advisory share owners focus more on guiding without getting deeply involved in decision-making. Both are important, but they play different roles in the company's story.
3. Functional Purpose
When you think about a startup, it's a bit like building a ship. Equity shares are the wood and nails; they form the core structure and are crucial for the journey. Those holding them aim to see the company grow and profit.
But a ship needs guidance, too. That's where advisory shares come in. They're like the compass and maps, guiding the ship.
People with advisory shares provide expertise and insight, helping the startup navigate tricky waters. They might not be part of the ship's structure, but they’re essential to ensure it sails in the right direction.
Simply put, while equity shares are about growth and profits, advisory shares are all about wisdom and direction.
Companies sometimes share their profits with those who own a part of it. This sharing is called dividends. If you have regular shares, you'll often get a part of these profits. It's like a reward for investing your money.
On the other hand, advisory shares are a bit different. They might get some profits, but usually less than regular shares. Sometimes, they might not get any profits at all. It all depends on the agreement when the shares were given.
So, regular shares are more about getting a return on investment, while advisory shares focus more on valuing expertise and advice. Always check the specifics when you're given shares to know what you're really getting.
5. Duration of Involvement
Advisory shares and equity shares differ in their duration of involvement with a startup. Equity shareholders hold a stake that reflects their ongoing commitment. Their involvement is continuous, and they hope for long-term growth and success.
In contrast, advisory shares are more temporary. Startups often bring in advisors during early stages, like the pre-seed or seed phase. These advisors provide vital insights, but their peak contribution might be within the first couple of years.
As the company evolves, the need for their specific expertise may diminish or change, leading to a shift in advisors.
So, while equity shareholders are consistently engaged, advisory shareholders have a more concentrated, shorter-term focus.
6. Capital Appreciation
Capital appreciation? That's just a fancy way of saying your money grows over time. Equity shares are a bit like planting a money tree in your backyard.
It might grow, but there are ups and downs, just like a rollercoaster. You hope it gets bigger over the years, like a house gaining value.
Now, advisory shares? They're more like a one-time ticket to a theme park. You enjoy the rides while you're inside, but when you leave, it's over.
Advisory shares don't usually get bigger over time like equity shares. They're more like a thank-you gift for helping out. So, with equity shares, you're on a money rollercoaster, while advisory shares are a short, fun ride in the park.
7. Vesting Schedule
So, here's the scoop on vesting schedules: Regular shares in a startup? It’s like having money in your pocket - you can spend it whenever you want. No waiting around.
But advisory shares? They come with a timeline. Think of it as a reward plan. You give your expert advice today, but you might need to wait a year or two before all your shares are truly yours.
Why? Startups want to make sure you're in for the long haul and not just a quick chat.
So, while an employee might wait years to get their full share, advisors often get theirs quicker, especially if they share their genius early on. It's all about ensuring commitment and getting value at the right time.
8. Rights in Liquidation
Last but not least, the rights in liquidation. If a company has to close down, it's not just about turning off the lights and heading home - there’s money and assets left to deal with.
Regular shareholders, those with equity, wait their turn to get a portion of what’s left, depending on how many shares they own. It’s straightforward, but here’s where it gets a bit tricky for them: advisory shareholders are at the front of the line.
Advisors get special treatment. In tough times, like when a company isn’t doing well and has to close, advisory shareholders are more likely to get their money back first.
They’ve got a safety net, making sure they recover their investment before others even get a look in. Fair or not, it's how the cookie crumbles.
Advisory Shares Best Examples
Advisory shares aren’t just fancy words; big names used them to grow. How? By offering them to industry bigwigs for their golden advice.
Let's see who nailed it at the crucial times:
- SpaceX: Elon Musk’s SpaceX gave advisory shares to folks like former NASA engineer Hans Koenigsmann. His advice? Pure gold in achieving huge space goals.
- Airbnb: Airbnb? Yep, they were in the game. They gave shares to hotel pro-Chip Conley. With his help, Airbnb took their guest experience to top-notch levels.
- Uber: Early on, Uber had some friends with clout, like Google’s ex-CEO, Eric Schmidt. They thanked them with advisory shares. Schmidt's advice? A roadmap to Uber’s massive growth.
- Startups on Accelerator Programs: Young startups in programs like Y Combinator get expert advice. How? By handing advisory shares to seasoned pros, they get tips and tricks for rapid growth. Cool, right?
For early founders understanding the difference between advisory and regular shares is crucial. Regular shares are your straightforward ownership slice. On the other hand, advisory shares are like a thank-you note for expertise, often with some perks.
One sure thing is that advisory shares can play a significant role in a company's journey to success. Whether you're looking to invest or offer guidance, knowing the ins and outs can make all the difference.