Definition Phantom equity is a type of compensation award that references equity, but does not entitle the recipient to actual ownership in a company. These awards come under a variety of different monikers, but the key to understanding them is knowing that they are really just cash bonus plans, where the cash amounts are determined by reference to a company’s stock. Phantom equity can have significant value, but may be perceived as less valuable by workers because of the contractual nature of the promises. Phantom equity plans can be set up as purely discretionary bonus plans, which is less attractive than owning a piece of something.
Two examples of phantom equity are phantom stock and stock appreciation rights:
Definition A phantom stock award is a type of phantom equity that entitles the recipient to a payment equal to the value of a share of the company’s stock, upon the occurrence of certain events.
Definition Stock appreciation rights (SARs) are a type of phantom equity that gives the recipient the right to receive a payment calculated by reference to the appreciation in the equity of the company.
Definition Warrants are another kind of option to purchase stock, generally used in investment transactions (for example, in a convertible note offering, investors may also get a warrant, or a law firm may ask for one in exchange for vendor financing). They differ from stock options in that they are more abbreviated and stand-alone legal documents, not granted pursuant to a single legal agreement (typically called a “plan”) for all employees.
Employees and advisors may not encounter warrants, but it’s worth knowing they exist.