Phantoms stock plans are contractual agreements between the following:
- The employee
- The company
- An advisor
- Any collaborator the company wishes to reward
What is a phantom share agreement?
Phantom stock is a contractual agreement between a corporation and recipients of phantom shares that bestow upon the grantee the right to a cash payment at a designated time or in association with a designated event in the future, which payment is to be in an amount tied to the market value of an equivalent number of shares of the corporation's stock.
What are the legal requirements for a phantom stock plan?
- SARs are for the amount of money equal to the increase in value of a specific number of shares over time.
- They may or may not have a specific date when they pay out.
- If they don't, employees can choose when they want to cash out once the shares vest.
- SARs don't offer dividend-equivalent payments.
Can phantom stock be issued to non employees?
WHEREAS, the Radian Group Inc. Equity Compensation Plan (the “Plan”) provides for the grant of Phantom Stock to non-employee directors of the Company, in accordance with the terms and provisions of the Plan. NOW, THEREFORE, the parties hereto, intending to be legally bound hereby, agree as follows:
How does a phantom stock plan work?
How Does a Phantom Stock Plan Work? An employer enters into an agreement with selected employees. In accordance with the terms of the plan, the employer grants the employees a number of units or phantom shares. The document informs the employees of the starting value of the shares along with other conditions of the plan, such as the vesting ...
Should I accept phantom stock?
Phantom stock is not a good idea if the company is planning on issuing them to most or all employees, especially if the shares will be paid out when the employee leaves the company or retires. In that case, phantom shares may be ruled illegal because of the Employee Retirement Income and Security Act (ERISA).
How do I avoid taxes on phantom stock?
Another way to avoid incurring a taxable event at the time of vesting is to peg the payout only to the increase in value from the time of the vesting to the time of the payout. Thus, the value of the phantom shares at the time of vesting is zero and not subject to taxation as compensation.
Do employees pay for phantom stock?
A phantom stock plan is an employee benefit plan that gives selected employees (senior management) many of the benefits of stock ownership without actually giving them any company stock. This type of plan is sometimes referred to as shadow stock. Rather than getting physical stock, the employee receives mock stock.
What is a phantom option?
A Phantom Stock Option Plan, also known as a Stock Appreciation Rights (SAR) plan, is a deferred cash bonus program that creates a similar result as a stock option plan. The sponsoring company determines a phantom stock price through an internal or external valuation of the company.
Can phantom stock be sold?
Phantom shares are available for publicly held and private businesses. The most common use is for privately held businesses as this group is typically most concerned with minimizing the number of shareholders. Minority shareholders complicate transactions when the time comes to sell.
Does phantom stock pay dividends?
Dividends are periodic payments made to shareholders from profits. Because participants in phantom stock plan are not shareholders, they are not entitled to dividends per se. However, the phantom stock plan may call for phantom dividends.
How are phantom stock payments taxed?
For both phantom stock and SARs, employees are taxed when the right to the benefit is exercised. At that point, the value of the award, minus any consideration paid for it (there usually is none) is taxed as ordinary income to the employee and is deductible by the employer.
How do you value phantom stock?
The answer involves two variables: (a) the presumed value of the company, and (b) the number of shares to be used in the plan. Once these two answers are known, the phantom share price is calculated as the former (the value) divided by the latter (the number of shares).
What is the difference between phantom stock and stock appreciation rights?
A stock appreciation right (SAR, in short) is a lot like phantom stock. The only difference in this is that it provides the right to the monetary equivalent of the increase in the value of a specified number of shares, over a specified period of time.
How do you make a phantom stock plan?
Take a look at five tips for creating a phantom stock plan below:Understand what you are — and aren't — offering. ... Set a proper valuation. ... Create your shares. ... Decide how to award stock. ... Set a reward schedule.
Is phantom stock a security?
To the extent that phantom stock is considered a security, private companies generally rely on the exemption from registration under Rule 701 of the Securities Act of 1933, which allows a company to offer securities to employees under a written compensatory plan if: (1) certain disclosure requirements are met and (2) ...
Can an LLC issue phantom stock?
LLCs do not issue stock. Rather, they issue membership “units” as equity. If an LLC has “checked the box” to be taxed as a corporation for Federal tax purposes, it generally can sponsor the equivalent of an employee stock ownership plan, and can issue the equivalent of incentive stock options.