Phantom stock agreements are a popular way for companies to reward their employees without diluting their equity. These agreements provide employees with a stake in the company`s success without actually giving them any ownership.
There are various forms of phantom stock agreements, each of which offers unique benefits and drawbacks to both the company and the employee. Here are some of the most common types of phantom stock agreements:
1. Deferred cash plan: This is the simplest form of phantom stock agreement, where the employee receives a cash bonus equivalent to the value of the company`s stock. The employee does not own the stock, but they receive the same financial benefits as if they did. This agreement is easy to administer and doesn`t require much paperwork, making it a popular choice for small businesses.
2. Stock appreciation rights (SARs): With SARs, the employee receives a cash bonus based on the increase in the company`s stock price over a set period of time. If the stock price goes up, the employee receives a payout. If the stock price declines, the employee does not receive a payout. This agreement aligns the employee`s interests with those of the company, as both parties benefit from an increase in the company`s stock price.
3. Restricted stock units (RSUs): RSUs are similar to stock options, but the employee does not own the stock until a certain vesting period has passed. Once the vesting period is over, the employee receives the stock or a cash equivalent. This agreement is more complex than others, as it involves vesting schedules and other legal considerations, but it provides the employee with a direct stake in the company`s ownership.
4. Employee stock ownership plans (ESOPs): ESOPs are retirement plans that invest primarily in the company`s stock. Employees receive shares in the company and can sell them when they retire or leave the company. This agreement is typically used by larger companies and can offer significant tax benefits to both the company and the employee.
When choosing a phantom stock agreement, it`s important to consider the needs of both the company and the employee. Each agreement has unique advantages and disadvantages, and the decision should be based on factors such as the company`s size, growth prospects, and overall goals. A qualified attorney or financial advisor can help both parties navigate the legal and financial considerations involved in setting up a phantom stock agreement.