what is an advisory share on shark tank

Natashya

3 min read

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25-12-2024

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Shark Tank, the popular reality TV show, showcases entrepreneurs pitching their businesses to a panel of wealthy investors, known as "Sharks." While equity deals are common, a less frequently discussed aspect is the "advisory share." This article dives deep into what an advisory share is, how it works, and why it's sometimes offered on the show.

Understanding Advisory Shares: A Non-Equity Stake

Unlike a traditional equity stake, which grants ownership in the company, an advisory share doesn't involve direct ownership. Instead, it provides the investor with a consulting role and often a share of profits or revenue, without requiring a financial investment from the Shark. This arrangement is advantageous in situations where:

• The company needs guidance: Entrepreneurs seeking expertise in specific areas, such as marketing, sales, or operations, may offer an advisory share in exchange for the Shark's mentorship and strategic input.
• The company lacks funding: If the company isn't ready for a significant equity investment, or if the Shark is hesitant to invest a large sum, an advisory share allows for a less capital-intensive partnership.
• The Shark wants a piece of the action without direct ownership: Some Sharks might prefer a revenue share as a way to profit from a company's success without the responsibilities of being a full equity partner.

How Advisory Shares Work on Shark Tank

The specifics of an advisory share deal vary, but typically involve:

• Defined responsibilities: The Shark commits to providing a specific set of advisory services, such as strategic planning, networking opportunities, or market analysis.
• Compensation structure: This could involve a percentage of revenue, profits, or milestones achieved. It might also include a fixed fee for specific services rendered. This is often negotiated and clearly outlined in the agreement.
• Term length: The advisory agreement will have a defined duration, after which the arrangement concludes, unless renewed.

Example: An entrepreneur might offer a Shark 10% of net profits for two years in exchange for the Shark's business acumen and network access.

Advisory Shares vs. Equity: Key Differences

When are Advisory Shares Suitable?

Advisory shares are not always the optimal deal structure. They're most suitable when:

• The entrepreneur needs strategic guidance more than capital. A company with strong sales but weak marketing could benefit from a Shark’s expertise in this area.
• The Shark is interested in a specific industry or product. A Shark may prioritize mentoring a company in their area of expertise, even if the financial return is less certain.
• The entrepreneur wants to retain more ownership. This approach allows the founder(s) to retain greater control over their business.

Potential Drawbacks of Advisory Shares

• Limited control for the Shark: They may lack the direct influence over company decisions that comes with equity ownership.
• Uncertain returns: The amount earned through the advisory share depends entirely on the company’s success. If the business fails to generate sufficient revenue, the Shark may receive little or no compensation.
• Complexity: Structuring and negotiating an advisory share agreement can be more complex than a simple equity deal.

Conclusion: A Flexible Funding Option

Advisory shares offer a flexible alternative to traditional equity deals on Shark Tank. They are a valuable tool when the entrepreneur needs strategic advice more than capital, or when the Shark prefers a revenue-sharing model. While they present both opportunities and risks, understanding their nuances can help both entrepreneurs and investors make informed decisions. Remember, the success of any deal hinges on clearly defined terms and a strong working relationship between the entrepreneur and the Shark.