Phantom stock is a type of deferred compensation plan that gives employees the benefits of stock ownership without actually granting them company shares. Instead, employees receive cash payouts tied to the company's stock value, typically upon a liquidity event (e.g., acquisition, IPO) or after a set vesting period. Phantom stock is often used to motivate employees and align their interests with company growth without diluting equity.
How does phantom stock work?
Employees receive units that mirror company stock value. When a trigger event occurs, they get a cash payout based on the stock’s market value.
How is phantom stock different from actual stock options?
Unlike stock options, phantom stock does not grant ownership or voting rights—it only provides a financial benefit based on stock performance.
What are the benefits of phantom stock for startups?
Startups can attract and retain talent without giving away equity, avoiding dilution while still offering stock-based incentives.
Are phantom stock payouts taxed?
Yes, payouts are treated as ordinary income and taxed accordingly when employees receive the cash.
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