Building a firm is often challenging, and business owners have to navigate countless obstacles, from operation to financial and governmental. To be on the safe side, start-ups need to get the support of a professional. One problem, however, many of these budding companies cannot afford these experienced individuals. On the other hand, the organization can offer advisory shares.
While this may seem like a straightforward solution, it is not as simple as it looks. There are certain factors that the founder must consider before taking this option. In this article, We will consider everything about working with advisors and offering them equity to enable people to make informed choices.
What are Advisory Shares
Advisory Shares are a non-financial form of compensation plan that involves a startup offering stock options to a mentor. This individual works for the company as a consultant rather than an employee. Considering that they get equity, these experienced professionals do not receive salaries or wages for their services.
Speaking of services, advisors do not undertake executive roles or make decisions directly. Like their name states, they offer advice, suggestions, and insights on various aspects of operations, compliance with the authorities, and the industry in general. For example, an advisor will give a company all the benefits and challenges of localizing their headquarters in a particular country.
With an advisor, the company can avoid some “baby errors” that may affect its growth. Instead of learning from your mistakes, this person will use their experience to help you avoid them.
Advantages and Disadvantages of Offering Equity to Advisors
To enable the crypto startup to decide if offering advisory shares to mentors is worth it, we will review the pros and cons of doing so.
Let’s start with the upsides:
- The startup can operate without incurring additional costs of paying more salaries.
- Advisors offer valuable insights that can help the startup to scale growth more efficiently.
- A crypto startup can utilize the network of the advisor to their advantage.
- The presence of advisors has a way of attracting investors, as capitalists tend to have more faith in companies working with experienced professionals.
On the other hand, the company has to understand the following downsides:
- Stock options do not have a fixed value, and this may put off some advisors.
- Advisory shares do not translate to voting rights for mentors.
- Despite not offering voting rights, offering equity to mentors can reduce the founder’s ownership of the company.
Advisory Shares – Steps A Crypto Startup Can Take to Protect Themselves
As shown above, there are benefits and drawbacks to offering advisory shares to mentors. Unlike a traditional organization, the stock option of a crypto start-up is its native cryptocurrency.
With blockchain tokens, the number of investors holding affects token value, resulting in negative price action from any form of sell-off. Considering this factor, crypto start-ups must take the following steps to ensure the project are never at risk for “fear uncertainty, doubt” (FUD):
- Advisors should sign an agreement that they will not sell off more than a particular percentage of their holdings.
- The crypto startup should always have a compensation plan for advisors who want to quit their roles.
Although this method is tricky, a crypto start-up can utilize the benefits of advisory shares to scale growth while protecting the company from unfortunate events in the future.