Meaning
Agreements that grant non-employee contributors equity options or shares typically dictate how these instruments turn into common stock upon specific transitions. An advisory shares conversion occurs when the non-employee contributor changes status or the venture undergoes a transaction that forces the reclassification of their instruments. This formal transition replaces the original option or grant with standard equity, aligning the long-term incentives of the advisor with those of the co-founders and later-stage venture capital investors.
Trigger Event
Liquidity occurrences like acquisitions or initial public offerings often act as the prompt for the exchange. Alternatively, a threshold period of service or a formal termination of the advisory agreement might require the adjustment. When the defined event occurs, the change begins automatically or through a formal call.
Equity Impact
The capitalization table of the enterprise experiences a shift from derivative securities to issued shares. Existing shareholders experience dilution because new voting stock enters the calculation. In addition, the tax status of the recipient changes as the value of the holding transitions from a future right to current property.
Reciprocal Obligation
The recipient ceases to hold advisory duties and instead holds the rights and risks of an equity investor. Ongoing service demands are released by the enterprise in exchange for the finalized shares. This ensures that the cap table holds only active or settled interests.
