As Wikipedia calls it, 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.
In layman terms, its a percentage of proceeds or dividends if the company gets sold. But why offer or take Phantom Equity?
Phantom Equity are offered by Business Owners when they hire a CEO. This is most often similar to Royalty. When a company is already making millions of dollars in revenue, it makes more sense for a business owner to offer phantom equity than equity unless they believe they’ll sell the company in future. If you’re a CEO, and when you take phantom stocks, you don’t actually own the business but you do get many perks that comes out of the equity.
Being a CEO is a demanding job and very stressful, they are many times part of a Bad Dad’s club. If somebody doesn’t understand phantom equity, it is actually a negative incentive.