Glossary

Phantom Equity

Definition

Phantom equity is a type of compensation plan that gives employees or executives the financial benefits of stock ownership without granting actual shares. Instead of owning real equity, recipients receive cash payouts tied to the company’s stock value, typically during a liquidity event such as an IPO, acquisition, or sale. Phantom equity is commonly used by startups and private companies to incentivize employees without diluting ownership.

How does phantom equity work?

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Employees are granted phantom stock units that mirror the company’s share value. Upon a trigger event, they receive a cash payout equivalent to the stock’s appreciation.

What is the difference between phantom equity and stock options?

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-Phantom equity: No actual shares; only cash payouts based on stock value. -Stock options: Employees receive the right to buy company shares at a fixed price.

What are the benefits of phantom equity for startups?

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Startups use phantom equity to reward employees without diluting ownership or affecting the cap table, making it attractive for private companies.

Is phantom equity taxable?

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Yes, phantom equity payouts are usually taxed as ordinary income when received. Unlike real stock, there are no capital gains tax advantages.

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