Giving phantom shares to employees
Giving phantom shares to employees can be a useful method of incentivising your employees. This tends to be a popular in tech start-up companies. It is an alternative to EMI share options and growth shares used by more established companies.
Overview of phantom shares
Phantom shares are a form of employee compensation. They provide the benefits of share ownership, such as dividends and share price increases. However, they do not involve the grant of options or transfer of company shares. Instead your company promises to pay your employees cash or the equivalent value of a specific number of shares at a future date.
Practical considerations of phantom shares
Typically giving phantom shares to employees is structured as follows:
What are the advantages of phantom shares?
Because no actual shares are issued, there is no dilution of the company's share capital.
Furthermore they can be used to attract and retain key employees by aligning their interests with your company's success.
Your company can design a phantom share scheme to fit it's specific needs and objectives. This can include custom vesting schedules and performance metrics.
Additionally your employees can receive significant deferred compensation without immediate tax implications until the payment is made.
What are the disadvantages of phantom shares?
Determining the value of phantom shares can be complex, especially for private companies who aren't listed. However, this can be overcome where they are issued in tandem with valuations required for raising funds from private investors.
Additionally, whilst phantom shares provide deferred compensation, there are also tax implications for both your company and your employees These require careful planning.
Lastly, the timing of payouts often coincides with liquidity events such as IPOs or acquisitions, which need to be clearly defined in the plan.
Why are they used in the tech industry?
There are a number of reasons why giving phantom shares to employees are especially popular in the tech industry:
The tax treatment
HMRC do not consider phantom shares as share option schemes. Therefore no tax charge arises on the grant of options in a phantom share scheme. As a result any cash payment will be taxed as earnings in the same way as any other cash bonus.
Some phantom schemes might give the company the choice of giving their employee shares instead. Where your company chooses to pay your employees bonus in shares this will be taxed on their money’s worth when received.
Summary
Giving phantom shares to your employees offers a flexible and effective way for your tech company to provide equity-like compensation without issuing shares. actual stock. As a result, this aligns your employee's interests with your company's performance. What's more they retain key talent, and avoid share dilution.
However, your companies must carefully design and manage you plan to address valuation, tax, and liquidity issues.
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