Ghost Shares: A Financial Instrument Granted to Employees as a Reward for Long-term Service
Phantom Equity, also known as shadow stock, is a type of deferred compensation offered by start-up companies to key employees or independent contractors. This form of equity compensation doesn't involve owning actual shares, but instead allows individuals to have a stake in the success of a company.
The Basics of Phantom Stock
Phantom stock payout is tied to the market value of the company's stock at the time of vesting. The recipient receives a cash payout at the time the company is sold. It's important to note that phantom stock recipients do not become shareholders and do not have voting rights.
Two Main Kinds of Phantom Stock Plans
There are two main kinds of phantom stock plans: "appreciation only" and "full value" plans. The key difference between these two lies in what the employee is paid out.
Appreciation-Only Phantom Stock Plans
In appreciation-only plans, the payout is based solely on the increase in the company’s stock value from the grant date to the payout date. Employees receive the economic benefit of the stock price growth but do not receive any value corresponding to the initial value of the shares when granted. Essentially, the payout equals the stock appreciation only.
Full-Value Phantom Stock Plans
Full-value phantom stock plans (sometimes just called phantom stock) pay out an amount equal to the full value of the phantom shares, which includes both the original stock value at grant and any appreciation since then. In other words, even if the share price does not increase, the employee's phantom shares have some base value that will be paid out upon vesting or payout.
Aligning Employee Incentives and Company Goals
Both types of phantom stock plans can help align employee incentives with company goals. Appreciation-only plans can better motivate employees to focus on company growth, as they only receive a payout if the shares increase in value. Full-value plans, on the other hand, offer a guaranteed baseline value to employees, making them potentially more attractive for retention purposes.
Understanding the nuances of phantom equity can help startups attract and retain talented employees while managing their capital effectively. As with any equity compensation, it's essential to consider the tax implications carefully.
[1] Investopedia. (2021). Phantom Stock. [online] Available at: https://www.investopedia.com/terms/p/phantomstock.asp
[2] Investopedia. (2021). Phantom Stock vs. Restricted Stock. [online] Available at: https://www.investopedia.com/terms/p/phantomstockvsrestrictedstock.asp
[4] Investopedia. (2021). Phantom Stock Taxation. [online] Available at: https://www.investopedia.com/terms/p/phantomstocktaxation.asp
In the world of business finance, both phantom stock and traditional equity compensation methods can play crucial roles in attracting and retaining top talent. Phantom stock payout, tied to the market value of a company's stock, awards employees a cash payout only at the time of company sale. This singular payment, unlike the voting rights associated with actual shares, is offered in both appreciation-only and full-value plans. The latter guarantees a base value regardless of stock price changes, thereby aiding retention, while the former incentivizes employees to focus on company growth by rewarding them based on the increase in the company’s stock value.
