Shares, commonly also referred to as stocks or equity, represent ownership of a portion of an enterprise. Companies sell shares to gain capital for operating their businesses. The public tends to deal with regular shares, although individuals such as consultants and advisers to businesses may also acquire advisory shares.
How are advisory shares different from regular shares?
The main difference between advisory shares and regular shares can be found in the nature of their acquisition. Regular shares are obtained via purchasing them, while advisory shares are provided to a company’s consultants, financial advisers and other key resource persons as a reward for providing their expertise.
What are Regular Shares (Equity)?
Regular shares, otherwise known as common stocks or equity shares, are a staple feature for many investment portfolios.
Each share represents ownership of a fractional piece of a company’s assets and holdings. When a person buys a share, they are providing the company with capital to finance their growth and operation in exchange for a small part of the business, as well as a few other benefits.
A person who owns stock is called a stakeholder, and they are entitled to vote and provide input on a company’s next moves and policies during a shareholder meeting. Each stock they own may also be compensated with dividends – small portions of a company’s earnings distributed to all of its shareholders at certain points in the year.
When stocks increase in value due to a company’s growth, people may also sell them for a profit.
What are Advisory Shares?
In terms of function, advisory shares are virtually similar to regular shares in that they provide the shareholder with special rights, such as the option to attend shareholder meetings, cast votes on important decisions, and earn dividends.
However, advisory shares are obtained differently from equity shares. They are principally provided by companies as a stock option for people who contribute valuable insights to the business. These people can include financial consultants, advisers, and experts in the industry.
Advisory shares are commonly offered as an alternative form of compensation for a person’s advice and expertise. Start-up businesses often offer advisory shares to their resource persons to save capital in exchange for the early opportunity to profit from their growth.
Differences between Advisory Shares and Regular Shares
The public acquires regular shares by purchasing them with the aid of a stockbroker – an intermediary that buys and sells shares on the stock exchange for a fee.
People have traditionally worked with human stockbrokers to buy shares, although it has become increasingly commonplace for the public to use online brokers due to the convenience of being able to buy immediately upon placing an order and at any time.
In contrast, advisory shares – by definition – cannot be bought with a stockbroker. They are specifically given out to individuals as compensation for the expertise that they provide to a company.
In most countries, including the United States, a person is eligible to buy and sell shares by the time they turn 18. Younger individuals may also make stock transactions provided that they use a custodial account that their parents and guardians can establish on their behalf.
The most common recipients of advisory shares are seasoned executives, senior partners, and key personnel who have run successful businesses in the past, as their previous experience, practical insights and web of connections can be highly advantageous for new companies. Their advice, in general, is voluntarily given.
Note that not all consultants of a business are given advisory shares. These include personnel who are already paid by the company for their consultancy, such as their own accountants, analysts and attorneys.
Large, well-off companies are able to offer their shares to buyers with an Initial Public Offering (IPO), when it is first available to investors on a stock exchange. Although the IPO process can be too difficult and expensive for many business owners, a company can accrue a sizable volume of cash flow by being publicly traded.
A company may also choose to be privately traded. Equity stocks may be offered to large private financiers such as venture capital investors, or smaller funders.
Advisory shares are typically offered by start-ups as another way of rewarding their advisors because paying them can tax their already limited pool of capital.
When a person becomes a stakeholder of a company by buying their regular shares, they are entitled to a suite of rights.
As collective owners of the business, stakeholders may ask for more information regarding the company and its performance. Their consensus via voting is required before any major company decisions, such as acquisitions and mergers, can proceed.
The stakeholders are also obliged to elect the board of directors – a body primarily charged with discussing and prosecuting shareholder rights.
A company whose advisers and experts have advisory shares may also set up its own advisory board. It is implicitly understood that advisory shareholders enjoy the same rights as regular shareholders, with the added obligation of providing expert advice to the company.
Comparison Chart: Advisory Shares vs Regular Shares (Equity)
|Areas||Regular Shares (Equity)||Advisory Shares|
|Acquisition||Purchased with a stockbroker||Provided to advisers|
|Eligible Individuals||People over the age of 18||Seasoned executives, senior partners and industry experts|
|Offering Company||Companies with Initial Public Offerings (IPOs), private offerings||Usually start-up companies|
|Stakeholder Rights||Asking for information; voting on major decisions||Similar, although their votes and opinions hold more weight|
How are Advisory Shares and Regular Shares similar?
There are plenty of aspects where advisory shares and equity shares are similar by virtue of being stock options.
These stocks can be valuable to the shareholder as investment vehicles. Depending on the company and its performance, both advisory and regular stocks can have the potential to grow in value over time, leading to high profits when the time comes to sell them.
They may also yield dividends, providing a steady stream of passive income – which may also grow in amount - to their shareholder.
What is an income stock?
Regular shares are considered income stocks when they provide the shareholder with a small but reliable stream of income – usually one to four times per year.
This income stream comes from a company’s surplus earnings during the year, in which sums of money are distributed to each shareholder in proportion to the amount of equity that they own.
Generally speaking, companies that offer income stock are less volatile in pricing, and take more time to appreciate in value compared to growth stocks. Utility companies often offer income stock.
What is a non-qualified stock option (NSO)?
A non-qualified stock option – or NSO – is a stock option given to employees as a way for them to profit from good company performance.
NSOs are a form of compensation that incentivizes employees with owning a small part of the company.
When an employee exercises the stock, they are required to pay ordinary income tax taken from the profit.
The scope of NSOs also extends to advisers and consultants. Advisory shares fall under non-qualified stock options for tax purposes.
Advisory shares and regular shares are two types of stocks that mainly differ through the nature of their acquisition, although they can be functionally similar – for instance, in shareholder rights.
Regular shares – also referred to as equity - are typically purchased with the help of a stockbroker by individuals over the age of 18. Large companies may offer these shares through their IPO and public listing on a stock exchange, while smaller companies may seek private investors.
Advisory shares are given to advisers who voluntarily give valuable advice and strategic insights to a company. Said advisers could be experienced businessmen, senior partners, or experts in a particular industry. Start-up companies often offer advisory shares to compensate these advisers.