If you are an entrepreneur looking to attract top talent to your startup, offering phantom equity may be a way to incentivize potential employees to join your team. Phantom equity is a type of compensation that gives employees the right to receive a portion of the profits of the company, without actually owning any equity in the company. This can be an attractive option for startups that may not have the financial resources to offer competitive salaries or traditional equity options.
If you are considering offering phantom equity to employees, it is important to have a clear agreement in place. A phantom equity agreement outlines the terms of the compensation, including how and when employees will be paid out. Here are some key elements to include in a phantom equity agreement template:
1. The percentage of profits that employees will be entitled to: This can be a fixed percentage or a percentage that increases based on the employee`s tenure with the company.
2. Vesting schedule: It is common for phantom equity to vest over a certain period of time, such as three years. This means that employees will only be entitled to their share of profits after they have been with the company for a certain amount of time.
3. Payment structure: Will employees receive payouts annually, quarterly, or at some other interval? This should be clearly outlined in the agreement.
4. Trigger events: What events will trigger the payout of phantom equity? This could include an acquisition of the company, hitting certain revenue targets, or other predetermined events.
5. Termination or resignation: What happens to the employee`s phantom equity if they leave the company? This should be clearly outlined in the agreement, including any potential buyout options.
It is important to have a lawyer review any phantom equity agreement before offering it to employees. Additionally, be sure to clearly communicate the terms of the agreement to potential hires. Offering phantom equity can be a great way to incentivize top talent to join your team, but it is important to have a clear and fair agreement in place.