Phantom stock

Phantom stock is a special equity compensation form that is linked to the company’s stock. The recipient never receives actual stock of the company, but instead a special account is created for him on which the value of his hypothetical stock is reflected. Its value increases or decreases depending on the market value of the actual stock of the company. It may even have phantom dividends, which would be equal to the dividends paid on a company’s stock. It may be subject to the same restrictions as shares, options, or other equity of the company, such as vesting and the rest. When phantom stock vests the holder receives cash equivalent to the value of company's shares he would hold otherwise.

 

Phantom stock is taxable to the holder on vesting, or if payment is deferred, on the date of actual payment. However, if the phantom stock provides for a deferral of the cash or stock payment after vesting, the holder may be subject to adverse tax consequences under IRS Section 409A.

 

This alternative equity was initially envisioned for family-owned companies that did want to dilute its capital or include non-family members as partners. Nowadays it can serve the purposes of startup founders who do not want to dilute the equity of the company or intend to preserve it for investors.

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