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What is a Phantom Equity Grant?

A phantom grant is a contract right to receive a percentage of the sale proceeds upon the sale of the company. It tracks the value of the equity of the company, but is not equity. It does give them the “full value” of the company, unless drafted in a manner to exclude it.  The upside is that the recipient is not an equity holder (no voting rights, no right to share in the profit of the company, no visibility to the finances) but it subject to dilution on the same basis as the equity holders, the downside is that if the recipient is not employed at the time of the sale event, they get nothing. That makes it highly risky for the recipient.

In short, it’s a sale bonus that tracks the value of the equity of the company. If the employee is not expecting to “be an owner” then it works great. If the employee wants to “feel like a partner”, then this will not give them that feeling.  It’s a good solution if it fits the expectations of the employee and the goals of the company.  -- Kurt Olender