What are advisory shares vs equity shares?

Introduction

Advisory shares and equity shares are two types of shares that are commonly used in business and investment scenarios. Understanding the differences between these two types of shares is crucial for investors and entrepreneurs. In this article, we will delve into the nuances of advisory shares and equity shares, exploring their definitions, features, and implications.

Advisory Shares

Definition: Advisory shares, also known as founder shares or sweat equity, refer to shares that are granted to individuals who provide advisory services or contribute to the growth and development of a company. These shares do not carry voting rights or ownership rights, but they provide the holder with the opportunity to benefit financially from the success of the company.

Features: Advisory shares are typically granted to founders, early employees, or consultants who contribute their expertise, industry knowledge, or networks to a company. These shares are often subject to vesting schedules, meaning that the holder must fulfill certain conditions, such as remaining with the company for a specified period of time, before they can fully own the shares. Advisory shares are usually granted at a nominal price or for free, reflecting their non-monetary nature.

Implications: Advisory shares serve as a way to align the interests of key individuals with the success of the company. By providing individuals with a stake in the company’s future, advisory shares incentivize them to actively contribute to its growth and success. However, since advisory shares do not carry voting rights or ownership rights, the holders have limited control over the company’s decision-making processes.

Equity Shares

Definition: Equity shares, also known as common shares or ordinary shares, represent ownership in a company. These shares give the holder voting rights and the ability to participate in the company’s profits and assets. Equity shares are the most common type of shares issued by companies and are typically bought and sold on stock exchanges.

Features: Equity shares provide the holder with voting rights, allowing them to participate in the decision-making processes of the company. The number of votes each shareholder has is usually proportional to their shareholding. Additionally, equity shareholders have the right to receive dividends, which are a portion of the company’s profits distributed to shareholders. In the event of liquidation, equity shareholders have a claim on the company’s assets after all other obligations have been fulfilled.

Implications: Equity shares represent a direct ownership stake in the company, giving the holder a say in its operations and the potential to benefit from its financial success. However, equity shareholders also bear the risk of the company’s failure, as they are the last in line to receive any remaining assets in the event of liquidation. The value of equity shares can fluctuate based on the company’s performance and market conditions.

Conclusion

In summary, advisory shares and equity shares are two distinct types of shares with different features and implications. Advisory shares are granted to individuals who provide advisory services or contribute to the growth of a company, but they do not carry voting or ownership rights. On the other hand, equity shares represent ownership in a company and provide the holder with voting rights and a share in the company’s profits and assets. Understanding the differences between these two types of shares is essential for investors and entrepreneurs navigating the world of business and investment.