A Phantom Stock Agreement may be an attractive alternative to traditional Stock Option Plans for the business owner who wants to reward key employees for their contribution to the company’s success.
With Phantom Stock, employees do not become shareholders because they do not actually receive company shares. Phantom stock, therefore, avoids concerns regarding company disclosures, management, control, and voting that may arise when employees become shareholders/owners through participation in a stock option plan. Interests in a Phantom Stock Plan is also exempt from qualification under corporate securities law.
Phantom Stock Agreements grant employees an interest in “units” that, for example, can have the same value as the company’s shares. As the value of the company increases, so does the value of the employees’ phantom stock. Like company shares in a stock plan, Phantom Stock Agreements can be structured in various ways. Like stock plans, employers can simply award phantom stock units to employees, they can sell them to their employees, or they can give employees the option to purchase phantom units at a later date at a pre-determined price.
As with Stock Option Plans, there are tax and other issues to consider before incorporating phantom stock into your business. However, given the issues associated with allowing employees to become part-owners of the company through stock plans, phantom stock may provide a better approach for your business.
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