The Very Real Promise of Phantom Equity
The terminology may frighten some away. But phantom equity, especially when it comes to selling your agency, has the potential to breathe new life into your agency. The upsides are well worth taking the time to ensure that phantom equity is anything but elusive to you. Make phantom equity work to your advantage by using it as the adhesive. It also binds essential human capital to your agency long-term, especially post-sale, promising profit shares in return.
What Is Phantom Equity and Why Does It Matter When Selling Your Agency?
Phantom equity is both equity and not equity. It offers the benefits of company stock without actually issuing any. Known also as “phantom stock” or “virtual shares”, they offer deferred compensation in line with company. It also based on performance much like actual stock would. And much like actual stock, this equity will vest over time and according to an agreed schedule. However, unlike actual stock, phantom equity never offers the opportunity to exercise a voting right; they are financial-only. This means holders of phantom equity don’t sit on the cap table, carry no liability and, as such, pose practically no added legal requirements or costs to get set up as phantom stockholders.
Should I Take Advantage of Phantom Equity When Selling My Agency?
If you are considering selling your agency and you’re an owner who is looking to stay on long-term, phantom equity makes perfect sense. Phantom equity ensures that a founder – or any other essential team member for that matter – stays on, stays committed and stays a part of the continued growth story even after a sale and post-sale transition period have been completed. Offering phantom stock in the business post-transaction offers an objective guarantee, aligning buyer and seller incentives for continued success.
After all, human capital is the key component to the business that was just acquired. Keeping the engine room of an agency firing on all cylinders. It also means binding that human capital to the agency’s continuing journey down the growth path. Especially when the agency is a smaller business – approximately 15 people or fewer – the value of each team member tends to be magnified. Binding essential team members to the long-run success can be a sure-fire win-win.
When Does it Make Sense to Avoid Phantom Equity?
If you are looking at selling your agency but do not plan to stick around for the long haul. And once your agency has been sold, then phantom equity may not be for you. Even a full year of commitment post-sale is not in alignment with the purpose and likely vesting schedule of phantom equity. Generally speaking, it takes a minimum of a three-year commitment for phantom equity to really begin to pay off.
In addition, if a buyer only wants to incentivize team members that stick around for an agreed minimum period that extends beyond the start of the vesting schedule, they may want to consider a cash bonus plan instead. The reason here is that these are generally forfeited altogether when an employee leaves whereas the vested phantom equity could mean having to pay out somebody who left sooner than a buyer might have liked.
The Bottom Line
The initial post-sale transition period of, on average, 90 days is tied into every deal. What happens beyond that is down to the interests and alignment of seller and buyer. If the interest is there for a seller to stay on board long-term and keep reaping the benefits of an agency’s ongoing growth story, the direct path to participating in the profits to come, is phantom equity.
