Many companies give their employees the opportunity to earn shares in the company through either an Employee Share Ownership Plan (ESOP) or a Share Incentive Plan (SIP). These plans are often referred to as `shares’ for short.
However, before the employee may buy these shares, they must sign a contract with strict terms and conditions on when they can sell the shares. These restrictions are called ‘advisory shares’.
In this article, we will cover what advisory shares are, how they work, advisory shares vs shares, and the risks/benefits of having them.
1. What are advisory shares
Advisory shares are a type of share that can be issued and traded on the financial markets. An advisory shareholder is an individual who provides information and expertise to the investment management team, but does not have voting rights. This term is often used interchangeably with “soft dollar, ” “soft commission” and “soft dollar agreement”. Advisory shares may also be called “soft dollar shares”, “soft dollars”, “soft commissions” or “advisory fees”.
2. How do they work
An advisory shareholder’s main contribution is their expertise on subjects such as the market, currency exchange rates, product pricing, and consumer demand. The shareholders are not involved in daily management of the company, but they provide critical information that may influence decisions of management.
Companies who have advisory shares usually allow them for 5 years on initially joining the company and then a further 5 years after that.
If the company were to let employees sell their shares after only 1 year, the share price would be very volatile and not representative of the actual business value. Restricting sales from employees allows for a more stable market price and valuation of the company.
3. Advisory shares vs shares
Advisory shares differ from regular, voting shares because the advisory shareholder has no say in how the company is run, and they have to abide by certain selling restrictions if they want to get their money out of the investment. Voting shareholders have full control over whether they would like to sell some/all of their shares.
Advisory shares are also different from regular, voting shares because advisory shareholders do not receive dividends on the company’s profits. Dividends are only paid out to common stock owners who have rights to vote in company matters. Advisory shareholders can, however, sell their shareholding for market value and then use that money to purchase dividend-paying shares as an alternative.
4. Who should buy them?
Buying advisory shares means that the shareholder has no voting rights, so these share types are best suited to those who just want to make an investment and then leave it alone for the long term. It is better to hold on to advisory shares without selling them because they may be worth more than regular voting shares second-hand. Usually, you must wait one year before selling advisory shares, but it is possible to get around this restriction by utilizing a 10b5-1 plan.
5. What are the benefits?
Advisory shares can be great for those who want to invest in their company’s stock market but don’t have the free time or knowledge of how this works.
– With advisory shares, a shareholder is entitled to a vote on a limited range of matters that may affect them directly.
– Advisory shareholders are protected by federal laws if the company they are invested in goes bankrupt.
– Advisory shares usually pay dividends, but the shareholder must wait until the board declares that there is leftover profit before this happens.
– Advisory shareholders can sell their shareholding for market price at any time if they want to take out their money and reallocate it elsewhere.
6. Are there any risks?
The biggest risk with advisory shares is that the company you invest in may file for bankruptcy, leaving your money worthless. You are not protected against this like you would be if you held voting shares. Advisory shareholders can learn about impending bankruptcies by monitoring shareholder meetings and correspondence with the board of directors.
To avoid this scenario, it can be beneficial to diversify your investments across different companies and sectors. It is also important to seek professional advice before making the investment because you will be world if anything were to happen to the company you invested in.
Conclusion/summary
Advisory shares come with many benefits, but they are not for everyone. An advisory shareholder must have enough knowledge to know what they’re getting into because it is possible to lose out on dividends. If you hold advisory shares, make sure you can sell them quickly if needed or else the price of the company’s stock may weaken in the short term. On the other hand, keep in mind that advisory shares are often worth more second-hand because of their limited voting rights.
Thanks for reading!
