Equity & options
Also called phantom stock, shadow equity
Phantom shares are a contractual promise to pay an employee the value of a number of shares at a future event, without issuing any actual stock or giving the holder shareholder rights.
The company grants a number of phantom units, each tracking the value of one real share. On a trigger event, usually an acquisition, a funding round or a fixed date, the holder is paid the value of those units in cash.
Because no shares change hands, the holder never appears on the cap table, has no voting rights and no information rights. The obligation is a contract between the employee and the company.
Plans differ on whether the payout is the full share value or only the appreciation since grant. Full-value plans behave like restricted stock units; appreciation-only plans behave like stock appreciation rights.
Phantom plans are common in Europe, particularly in Germany and Spain, where issuing and administering real options is costly and notarial requirements make cap-table changes slow. They are also used for employees in countries where the company has no legal entity capable of issuing stock.
The cost is that the payout is a cash liability at exit, which reduces proceeds available to shareholders, and investors will want it modelled in the waterfall before a round closes.
No. They are a contractual right to a cash payment. The holder has no voting rights, no information rights and no place on the cap table.
On the trigger events named in the plan, typically an acquisition, an IPO, a qualifying funding round or a fixed anniversary date. If no trigger occurs, they may never pay out.
They are simpler and require no cash to exercise, but they usually pay ordinary income tax rates rather than capital gains, and they depend on the company having cash at the trigger event.
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