Want to get 30% more productivity out of your employees without increasing their salary?

This is a trick an investment banker told me about when I was about a year out from selling my company and didn’t want to bring in an expensive C-Suite.

The secret is something called 'Phantom Equity.'

Phantom equity is a way to give them a one time bonus in the event the company sells.

It makes it very easy to say “Hey I want to sell this business one day and I want you to get a piece of the upside.”

It's a share of the potential spoils without the drama of voting rights or those confusing employee stock option plans. Intrigued?

Dive into our latest edition for the full scoop. I’ve even included the exact template I’ve used to create Phantom Stock agreements in my businesses. Check it out!

Best,

Phantom stock is a form of employee compensation that private equity firms often use to incentivize the business's operators to keep a lean team and work towards exit metrics, particularly the business's profitability.

In phantom stock, a pool of 10-15% of what the potential exit price could be, often called 'net equity proceeds', is set aside.

If the business sells, the remaining pool, after deducting debt and other adjustments, is shared among the employees, thus allowing them to partake in the exit proceeds.

The main advantage of phantom stock over common stock is that it does not provide voting rights, thus avoiding complexities related to employee stock option plans and their annual valuations.

One software engineering firm with $28M in revenue carried out a case study with their 85 employees. After implementing phantom stock, the company erased their employee turnover problem and achieved 50% growth. I’m not making this up!

A phantom stock plan is set, outlining the business's current valuation, the capital structure, and the fact that employees will be vested over time.

There are two types of Phantom Stock: Appreciation Only & Full Value.

For example, Bethany was given 50 phantom shares in January 2021.

At that time, the price per share was $100 & the vesting period, for our example, is 4 years. After those 4 years, the share has appreciated from $100 to $125.

In January 2025, in the Appreciation Only method, Bethany will receive the appreciated amount per share.

($125-$100) X 50 shares = $1250

In January 2025, in the Full Value method, Bethany will receive the full value of the share.

$125 X 50 shares = $6250

In private companies, it’s most common for the funding of the equity pool to occur on a triggering event (usually the sale of the company).

Phantom stock aligns the interests of the employees with the business, as it incentivizes them to keep the team lean and the business profitable.

The management can make decisions in the best interests of the business, knowing that the employees are also stakeholders and will also be impacted by the consequences.

Phantom stock encourages open book management, where employees are aware of the business's performance, enhancing transparency, and keeping employees focused on their future benefits.

Employees with phantom stock do not have voting rights, thus avoiding complications that come with giving employees decision-making powers.

They are also shielded from any capital calls in case of business downturns, unlike common stockholders.

As, and when, more employees are brought in, they also join the phantom stock pool, potentially diluting the pool for existing members. Employees are motivated by phantom stock as it can lead to significant monetary benefits during an exit, making them strive harder operationally.

TRANSFORM YOUR BUSINESS INTO A HIGH-VALUE ASSET

Discover the step-by-step blueprint for turning your business into a lucrative asset that can be sold for life changing money.

The backbone of EXIT OS is to understand the difference between assets that all investors want to buy and your current business. Then we go to work on closing those gaps.

I've spent years building, teaching & updating the Exit Operating System with tools, trainings, and templates.

Here's a few examples of resources, templates, and lessons you get access to with ExitOS:

Whether you’re a founder thinking about moving to a new venture but wanting to keep your current business in your portfolio

Or thinking of launching a new product within your company

Or you’re ready to cash out in the next few months and want to maximize your value…

If you want to increase your chances that your asset is worth the most possible (whether you want to sell or not)... then try Exit OS.

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