Advisory Shares on Shark Tank Explained
If you are a fan of the show Shark Tank, you may hear the investors use the words advisory shares. While advisory shares on Shark Tank are not the only place where advisory shares are discussed and can be used, this is a common place where people not in the business industry hear this term.
If you have heard this term, you may wonder what advisory shares are, who gives them out, and how they are beneficial. Read on to see a few frequently asked questions about advisory shares and the answer to these questions.
What Are Advisory Shares?
When an inventor makes an offer in a business that is featured on Shark Tank, they are often offering up advisory shares. For example, when an investor is offering $100,000 for a ten percent stake in the company, this is often given to the investor as an advisory share.
This allows the shark or investor to invest in a company and buy equity, without being offered actual shares in a company.
This is important, as it helps to avoid conflicts of interest and helps to ensure that the owner remains the true owner and can make business decisions on behalf of the business.
Basically, an advisory share is provided to the shark in exchange for their professional advice and guidance, and a small amount of money. In return, the inventor or owner retains control of their company.
Who Gives Out Advisory Shares?
While advisory shares is a term that is frequently used on the show Shark Tank, it is not a term that is limited solely to this term. In fact, this term has been around long before the show came to be on television.
Advisory shares are often given out by start-up businesses to investors who are looking to make small investments in a business in exchange for a small amount of start-up money, as well as guidance and professional advice.
This is a different type of stock option than is given to employees. Investors have the opportunity to buy shares, but they may have an opportunity to buy a limited number of shares to ensure that the owner of the company is able to retain full control over the company.
What Are the Benefits of Advisory Shares?
Advisory shares are beneficial to both investors and to start-up business owners. One of the biggest benefits associated with advisory shares is that it helps a small business or start-up business get the help they need taking their business public or growing their business, without having to pay a professional for guidance right then and there.
Paying a professional to help guide a start-up business can be costly, and many businesses do not have the funds to pay that fee. As such, a professional is given advisory shares, that they can cash out later, which essentially means a start-up is not paying that fee right away.
The benefit to the investor or advisor is that they have an opportunity to make their advisory shares grow quickly if they can help the business to grow quickly.
As such, they have an opportunity to make a lot of money if they truly believe in the business and the business takes off.
What Are the Downsides of Advisory Shares?
While there are many upsides to advisory shares, there are also a few downsides to advisory shares as well. One of the downsides for advisors and investors is that if the business fails, the advisory shares can lose their value, or be worth nothing.
This essentially means that they may have put in a lot of work and not received any pay for the work they put in. Another common disadvantage associated with advisory shares is that in some cases, the advisor and business owner may not see eye-to-eye on the direction of the business or what the business should do next.
A business owner has full control over the business, but the advisor may get upset if they feel that their advice is not being heard, listened to or followed. This can create a lot of conflict within a business, or can even slow down the release of a product.
How Much Can Be Given in Advisory Shares?
On the show Shark Tank, you often see advisors get 10, 15 or even 20 percent of a company’s valuation in advisory shares.
However, you have to keep in mind that the show features some of the most famous and successful advisors in the world, and as such, these advisors are often compensated higher than start-up companies would typically compensate advisors.
In the real world, it is more common for advisors to be given anywhere from one to five percent of a company’s value in advisory shares. It is very rare that a company provides more than this to an advisor.
What Does a Vesting Period Mean When It Comes to Advisory Shares?
When advisory shares are given, there is typically a vesting period. This is typically anywhere from one year, or 12 months, to five years, or 60 months.
A vesting period essentially means that an advisor cannot cash in their shares during the vesting period. This helps to ensure a business is not having to pay out shares that they do not have the finances to pay out on, while also helping to tie down an advisor for a set period of time.
Essentially, the longer the vesting period is, the longer the advisor is working for the company before they can cash in their shares.
If you are an inventor who is planning on appearing on an episode of Shark Tank, or you are just a huge fan of the show, you may have heard the term advisory shares on Shark Tank.
This may have gotten you wondering more about advisory shares and how they may benefit the investors and the inventors.
Learning about this term can help you to better understand what the investors are talking about when they offer up advisory shares, and how and why advisory shares may be beneficial to both you and the investor if you are trying to get your products, store or invention features on this hit television show.
