Advisory Shares: An Employee's Overview of Equity Compensation Choices

Advisory Shares: An Employee's Overview of Equity Compensation Choices

June 19, 2023

Advisory Shares: An Employee's Overview of Equity Compensation Choices

Imagine embarking on a journey through the complex landscape of equity compensation, ready to unravel the mysteries of Advisory Shares. Sounds exciting, right? Along the way, there's also an encounter planned with another intriguing form of equity compensation: Restricted Stock Units (RSUs).


Understanding Advisory Shares

Imagine being in a room filled with people buzzing with ideas, optimism, and an unquenchable thirst for growth. That's what the early stages of startups often look like.

One thing that often facilitates this growth and innovation is a term you might have heard before: Advisory Shares. These seemingly small pieces of equity can play a significant role in a company's journey.

What are Advisory Shares and When are They Given?

Advisory shares are equity interests, a slice of the company's ownership, offered to advisors. But who exactly are these advisors?

They're the individuals who bring unique skills, experiences, or networks to the table. Their contribution can range from strategic guidance to connecting the company with valuable business opportunities, helping shape the company's trajectory.

These shares are often granted during the early stages of a company's life when cash is tight, and attracting top-notch advisors is crucial. Advisory shares can be a compelling offer - an invitation for the advisor to join the journey and share in the company's potential success.

How Advisory Shares Work

Navigating the advisory shares' landscape might seem like a daunting task, but you've got this! Focus points:

  • Contractual Obligations: It all begins with an advisor agreement, a contract that outlines the advisor's role and responsibilities, as well as the terms of the advisory shares.

  • Vesting Schedule: Advisory shares generally vest over a period of 24 months. This means that the advisor earns their shares gradually over time, providing an incentive to continue their involvement with the company.

  • Tax Implications: It's crucial to remember that advisory shares aren't just a gift - they come with tax obligations. The shares are considered taxable income based on their fair market value at the time they're granted.

Pros and Cons of Advisory Shares

Like everything in life, advisory shares have their upside and their challenges:

  • Benefits: They represent an opportunity to share in the potential upside of a company's success without having to make a significant upfront financial investment.

  • Challenges: However, their value is tied to the company's performance. If the company doesn't succeed, the advisory shares might end up being worth very little, or even nothing.

All this information gives a solid understanding of advisory shares. But remember, advisory shares are just one piece of the equity compensation puzzle.

Advisory Shares in the Broader Context of Equity Compensation

Equity compensation is a big, vibrant mosaic with each tile representing a different type. You've already ventured into the world of Advisory Shares, but there's a lot more to see.

Many forms of equity compensation grace this mosaic, including Stock Options, Employee Stock Purchase Plans (ESPPs), and Restricted Stock Units (RSUs). Each comes with its unique colors and patterns – or in more technical terms, features and considerations.

  1. Stock Options: Picture a scenario where employees get a golden ticket. This ticket allows them to purchase shares at a fixed price, no matter what the market value may be in the future.

That's essentially how Stock Options work. If the company's stock price rises, employees can use their golden ticket to buy shares at the lower, predetermined price. This difference between the exercise price and the current market value is where the benefit lies.

  1. Employee Stock Purchase Plans (ESPPs): Think of ESPPs like an exclusive club. In this club, employees get the privilege to purchase company shares at a discounted price, often through payroll deductions.

It's like a special sale event where only employees get to shop! This benefit allows employees to own a part of the company they work for, often at a significantly reduced price.

  1. Restricted Stock Units (RSUs): RSUs are a bit like a treasure chest that opens after a certain time or upon achieving specific performance milestones. They are company shares given to an employee through a vesting plan and distribution schedule.

Employees receive the shares after remaining with their employer for a specific length of time or reaching predetermined goals. The real treasure here is the potential for significant financial gain if the company's stock price increases over the vesting period.

Each of these forms of equity compensation has its perks and considerations, making them more or less attractive depending on the specific situation. Understanding how Advisory Shares fit into this broader context is crucial for getting the most out of your equity compensation.

But of course, the journey of understanding doesn't stop here. There's another popular form of equity compensation you might be curious about – Restricted Stock Units (RSUs).

Advisory Shares vs. Restricted Stock Units: A Comparative Overview

Equity compensation is a little like a closet full of different outfits. Some outfits fit certain occasions better than others, and the trick is knowing which one to wear when.

Just like this, Advisory Shares and Restricted Stock Units (RSUs) each have their time and place within a company's equity compensation plan. This part of the journey shines a spotlight on RSUs, focusing on what they are, how they differ from Advisory Shares, and their potential benefits.

Defining RSUs and How They Differ from Advisory Shares

Restricted Stock Units, commonly known as RSUs, represent a commitment from the company to give an employee shares at a future date. Once vested, they convert into actual shares of the company, bringing along with them the company ownership and voting rights.

On the other hand, Advisory Shares are a bit more abstract. They represent potential ownership in the company, usually given to advisors for their input and advice. Unlike RSUs, they don't always come with voting rights. This fundamental difference gives each a unique set of characteristics.

Advantages of RSUs over Advisory Shares

So, why might someone prefer the jeans and t-shirt combo of RSUs over the formal suit of Advisory Shares? Here are a few reasons:

  • More Predictable Value: RSUs carry a more predictable value because they are actual shares. They're not as closely tied to company performance as advisory shares, making them a less risky proposition.

  • Favorable Tax Treatment: When it comes to taxes, RSUs can be more favorable. While both RSUs and advisory shares are subject to income tax when vested, RSUs often allow for tax deferral opportunities, potentially leading to significant tax savings.

  • Better Alignment with Company Goals: Companies often tie RSUs to specific performance objectives, making them a powerful tool to align employee goals with those of the company.

Choosing between Advisory Shares and RSUs can be as complicated as choosing between different outfits for a big event. While this section provided an insight into the world of RSUs and how they compare with Advisory Shares, remember, the choice depends heavily on your specific circumstances and objectives.

Now you know about both these options in detail. But how can you make the decision that’ll suit your specific situation?

Making the Best Decision: Advisory Shares, RSUs, or Another Route?

Equity compensation is not a one-size-fits-all suit. It's more like a custom-tailored ensemble that fits your specific needs, goals, and circumstances.

Whether it's the formal elegance of Advisory Shares, the casual comfort of RSUs, or the unique style of another type of equity compensation, making the best decision involves a closer look at your personal situation and aspirations.

Factors to Consider in Making a Choice

Choosing an equity compensation plan isn't just about understanding the different types. It's also about understanding yourself. Some things to note before choosing:

  • Your financial situation: Like deciding on a big purchase, your current financial situation will impact your choice. Can you afford to buy the shares if you're offered stock options? Would you benefit more from the tax advantages that RSUs can offer?

  • Your beliefs about the company's future: Equity compensation is a long-term game. You need to believe in the company's future and be ready to bet on it. Ask yourself, do you see the company's stock price going up in the future?

  • Your risk tolerance: Just like any investment, equity compensation comes with risk. Depending on the company's performance, the value of your shares could fluctuate. Are you comfortable with this risk, or would you prefer the more predictable value that comes with RSUs?

Seek Expert Advice

Equity compensation is a complex world, and while having a basic understanding is essential, seeking expert advice can often be invaluable. A financial advisor who understands the intricacies of equity compensation can provide you with personalized advice based on your specific situation. 

Whether you're leaning towards Advisory Shares, RSUs, or another route, an expert's perspective can help ensure your decision is well-informed and beneficial in the long term.

After all, the best outfit is not just about what's in fashion. It's about what fits you perfectly and makes you feel confident and comfortable. So, take your time, consider your options, and seek advice as needed. Remember, you're not just choosing an equity compensation plan; you're tailoring your financial future.

Final Thoughts

Embarking on the journey of understanding equity compensation can feel a bit like trying to conquer an intricate puzzle. It's complex, sure, but once you familiarize yourself with its key aspects, such as Advisory Shares and RSUs, it becomes less daunting and more like a challenging, yet rewarding game.

In this game, there are no one-size-fits-all strategies. Each option comes with its unique set of pros and cons, and the best choice varies from person to person, like choosing the right fit from a wardrobe full of diverse styles.

Keep in mind that this isn't a game you have to play alone. Seeking professional advice and asking the right questions can be your secret weapons to success.

Stay curious, keep learning, and remember, this isn't about guessing what will work best for others. It's about understanding what works best for you, which brings the best possible outcome: a personalized equity compensation plan that aligns with your financial goals.

If you’d like to get insider advice about equity compensation and the types that’ll best suit your needs, drop us a message. Let’s talk!

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