What Are Advisory Shares on 'Shark Tank' and Why Are They Popular?
If you have been following 'Shark Tank,' you might have come across the term “advisory shares.” What are advisory shares on 'Shark Tank'?
Shark Tank has been a good way for small startup companies to raise capital. If you have been following the popular reality show, you might have come across the term “advisory shares.” What are advisory shares on Shark Tank and how are they different from normal shares?
Shark Tank began in 2009 and has completed 13 seasons. Billionaire investor and Dallas Mavericks owner Mark Cuban is among the core sharks on the show. Startup companies pitch their products to the “Sharks” for a possible investment. If any of the Sharks like the proposition, they announce an investment in the venture.
How does 'Shark Tank' work?
Before we discuss advisory shares, we’ll look at how Shark Tank works. If the investors like the product, they announce an investment. You’ll hear something like $100,000 for a 25 percent stake in the company. The deal is like any other private equity investment where the Sharks invest money at a set valuation.
In this case, the post-money valuation of the company would be $400,000 and the Sharks would hold a 25 percent stake in the venture for their investment of $100,000.
What are advisory shares?
Now, let’s learn about advisory shares. These aren't stocks but stock options that are paid to the company’s advisers. Usually, the advisers are experts and advise the company on aspects like the business strategy. They're different from professionals like accountants whose services the company uses for a fee.
The advisory shares aren't different from the stock options, which are the preferred compensation tool for corporate America, at least when it comes to the C suite executives. Elon Musk was the highest-paid executive in 2021 despite not drawing any fixed salary from either Tesla or SpaceX. Tim Cook received $82.3 million as stock options in 2021, which was over 83 percent of his total compensation in the year.
What are advisory shares on 'Shark Tank'?
At times, along with giving an upfront stake to the Sharks, the founders on the show structure the deal as a mix of ordinary shares and advisory shares. In our example, the founder on the show might pitch the investment as $100,000 for 20 percent and add another 5 percent worth of shares as advisory shares.
Advisory shares are better for the founder since they help them retain a higher stake in the company. Also, it would be positive from a valuation perspective. In this case, the company’s valuation would rise to $500,000 if the investment is made for a 20 percent stake and 5 percent advisory shares.
Since advisory shares are stock options, they don’t reflect in the current valuation even though listed companies provide a fully diluted share count to give markets a clear picture of the dilutive securities as well as the expected increase in outstanding share count.
What makes advisory shares popular?
Just like stock options, the advisory shares better align the interest of the two parties. A lot of founders who feature on Shark Tank might also need advisory support related to the business strategy that the Sharks might provide.
Since most startups on the show are bootstrapped, advisory shares would help them get access to the Sharks' expertise without shelling out cash or doling out a higher share in the company.