Phantom Equity

How does Phantom Equity Work? 

Unlike other equity classes that are typically tied to compensation, phantom equity does not provide the recipient with an actual ownership stake in the company or a transfer of property.  Phantom Equity is a book-keeping cash compensation vehicle that tracks the underlying equity in the issuing company, but will never have actual ownership conferred to the grant holder.

Phantom equity is a book-keeping entry that provides the grant holder with a cash payment when certain vesting milestones are reached.  These milestones can be either through schedule vesting or through performance vesting.  When these grants are made in private companies, it is crucial to understand the underlying valuation metrics that the company is utilizing for pricing of these awards, and if they are linked to performance metrics, how those metrics are calculated.  

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Upon Vesting, these equity-like vehicles will compensate the grant holder with cash compensation, similar to bonus cash compensation, and applicable tax withholding will occur.  If you are in a private company that doesn't have ongoing liquidity to provide the cash compensation to you, there will likely be a second-trigger vesting requirement that specifies a certain time period where this award will pay out to you.  An advantage to Phantom Equity plans is that because these are cash compensation vehicles, the issuing company will likely be able to provide the cash compensation to the grant holder sooner than if the grant holder owned actual, non-Phantom, equity.  In the latter case, a liquidity event would need to occur either through IPO, change of control, or Tender offer in order to provide the necessary cash during the vesting process.  

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If you are in the recruiting process and would like to have subject matter expertise assist in analyzing your offers, helping you to negotiate more equity, or restructuring your counter-offers to be more advantageous to you, please Schedule a Meeting with our team at your convenience.