Phantom Stock

Note: This Insight was first published on the Chatterjee Legal website on 7 October 2021.

Key Takeaways

• Phantom stock is a contractual right that follows the price movement of a company's actual stock.

• Individuals granted phantom stock can cash out at a designated time or in association with a set event.

• Phantom stock agreements can often be more flexible in nature than outright grants of equity.

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Full Text

Phantom stock gives holders (typically employees) the benefits of stock ownership without the work, expense and level of documentation required for issuing them real stock. Instead, holders are granted contractual rights to payment, the amount of such payment tracking the price movement of a company’s actual stock. The holder of such rights often has the right to a cash payment: a) at a designated time; b) over a vesting period; or c) in association with a set event in the future like a change of control or liquidity event. Startup attorneys typically advise startups on the process for creating and granting awards of phantom stock.

For startups, phantom stock can be used in place of stock options to provide employees or other contributors with a simpler vehicle for equity participation. Both companies and recipients may benefit from the potential flexibility of phantom stock arrangements and potentially reduced filing burdens. For more established companies, phantom stock is often used as part of a cash bonus plan.

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