Phantom stock and stock appreciation rights (SARs) are compensation arrangements that pay an employee cash based on the increase in company value, mimicking the economics of equity ownership without actually issuing real shares.
Phantom stock tracks the full value of a hypothetical share; a SAR pays out only the increase in value from when it was granted, similar to the built-in gain on a stock option. Both are typically settled in cash rather than stock, which avoids diluting the actual cap table, but the cash obligation still has to be paid from somewhere, usually at exactly the moment (a sale, a major liquidity event) the company might already have other cash demands.
These arrangements show up most often at companies that don't want to, or legally can't easily, issue real equity, an LLC using profits interests instead, or a company trying to reward someone without adding a new name to the cap table. Worth modeling the actual future cash obligation carefully, since it's a real liability even though it never shows up as dilution.
Add your revenue and website for a full diligence brief, reviewed by a CPA who ran EY's West Coast R&D Tax Credit practice for 13 years.
Keep reading