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How to Use Phantom Shares Instead of Equity

An image of financial markets which can be used for Phantom Shares

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When it comes to growing your business, one of the most important things you can do is get future team members excited about joining your team and working for you in the long term. Phantom shares can help businesses achieve this.

This won’t happen if you don’t sell prospective team members on the idea of leaving their current jobs and starting a new venture with you.

The good news is that there are plenty of great ways to get new team members excited about joining your accounting firm without having to give them equity. In this blog post, you will learn how to use a type of share called “Phantom Shares”. These shares can be used instead of equity to recruit new team members.

What are Phantom Shares? 

Phantom Shares build loyalty among key managers, employees, or collaborators. However, they are not real shares.

An essential point about Phantom Shares is that employees will never become partners in the company, which is the case with company stock and stock options. This makes an attractive option for ensuring that key employees remain with the company, allowing them to enjoy the economic rights that come with holding the shares, but without being a company shareholder and having influence over decision making.

Since it’s not the typical kind of share, many people can design these shares in different ways. However, most companies create a timetable and series of conditions that allow these shares to be awarded for a specific amount.

This approach is enticing for newly formed companies as their main task is to attract talent. A Phantom Stock plan earns their loyalty and motivates employees.

How do Phantom Shares work?

To introduce a phantom share plan, the company’s shareholders must hold a general meeting and approve the outline of the program.

They must also:

  • Authorize the pool of phantom shares, which is the percentage or number of shares.
  • Define the beneficiaries.
  • Define how they are awarded.
  • Establish the minimum initial and pre-vesting period as well as the vesting period.

The most common goals are:

  • Achieving a certain annual turnover.
  • Closing a transaction within a specific timeframe.
  • Selling the business.
  • Committing to remain with the company.

As the beneficiary meets these milestones, they gain more phantom shares.

Another essential element when designing an incentive plan is configuring the so-called liquidity events. Phantom shares are converted into cash at this time.

Typically, these events are associated happen at during key corporate moments. For example, reaching a certain level of turnover, signing a specific contract, closing a project, or the total or considerable sale of the company’s shares/equities.

However, they can also be converted into cash on a specific date without depending on any event.

What are the advantages?

There are six key benefits of using Phantom Shares in your business.

Loyalty

Since Phantom Shares have a vesting period, they are likely to help retain key employees. Having a group of key staff is important in the hiring process as well as creating a winning company culture. If employees leave before the vesting schedule, they forfeit their rights.

Motivation

The company motivates its employees to ensure its growth, linking remuneration to the company’s success and growth.

It’s not Equity

The beneficiary of the Phantom Shares does not become a partner in the company but enjoys its main advantage: economic rights. This is great for investors in start-ups and shareholders as these employees cannot attend general meetings and do not have voting rights.

Lower up-front costs

These remuneration systems serve (among other things) to try to minimise the initial costs (fixed part) and ensure that part of the salary is variable depending on the company’s evolution. They are a great tool in the recruiting process and form an important part of employee compensation. Be sure to include details of your incentive program in your company’s job descriptions.

Flexibility

The parties to the agreement are free to determine its terms and conditions. But on the other hand, they do not change the capital structure or ownership of the company, thus avoiding problems that may arise with the entry of new shareholders and avoiding additional legal and notarial costs.

Taxation

The government will tax these financial payments as earned income for personal income tax purposes and not with dividend tax.

How can Lexidy Help? 

At Lexidy LegalTech Boutique, we can help you issue Phantom Shares through your company and provide you with the legal assistance you need to be able to create the most suitable plan for you, taking into account many factors such as the amount of annual income the company has or the status of the employees in question.

Our team of Corporate lawyers work with companies of all sizes to structure their compensation and incentive plans for success. The key to the success of your business is people and using Phantom Shares to attract the best talent.

Lexidy’s corporate lawyers can work with you on all types of Phantom Stock, shadow stock, and stock option plans and advise you on the share classes. Furthermore, we can give you legal guidance for employee stock purchase plans and the appropriate share prices.

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