editione2.1.1Updated September 12, 2022
While most employee equity compensation takes the form of stock, stock options, or RSUs, a complete tour of equity compensation must mention a few less common forms.
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 what is in essence vendor financing. They differ from stock options in that they are generally shorter, stand-alone legal documents, not granted pursuant to an equity incentive plan. In contrast, such a “plan” is intended to be used more broadly for employees, contractors, advisors, and board members.
Employees and advisors may not encounter warrants, but it’s worth knowing they exist.