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Phantom Stock – A Better Way to Motivate Your Employees

By Generational Equity

motivate employees

We regularly meet business owners who use a variety of methods to attract, retain, and motivate their employees.

One of the most common techniques we see is providing employees with company stock so that they feel like they have an ownership position in the business. The goal of this method of motivation is great, however, when it comes to the eventual sale of your company it comes with one huge downside: Your employees get to vote!

That’s right, every employee that has received even a single share of the stock in your company is required by law to vote and approve any ownership changes. Can you imagine how complicated this becomes? We do, because we see it all the time.

In fact we recently completed the evaluation of a company whose majority owner decided that, based on a variety of factors, now would be a great time to exit. When we created the engagement agreement, we had to point to him that the 17 minority shareholders, all current employees, would not only need to sign the agreement they would also need to be involved in approving the sale. Needless to say, he was not pleased to hear that information as he was keeping the potential sale completely confidential.

Fortunately, there is an alternative method you can use to give your employees the feel and pride of ownership without giving them voting rights.  

Phantom stock or phantom equity is a method that allows you to give your employees shares of non-voting stock which they can redeem later, usually when the company is sold or when the employee retires (assuming the employee is fully vested). And unlike traditional shares, that need to be repurchased when an employee leaves or is terminated, phantom shares “essentially disappear upon certain triggering events”.

There are also a number of tax advantages to both the employee and the company via the use of phantom stock. The most important is that a company can classify phantom stock as an expense and use it as a write off in the year given. 

Create an Exit Plan that Protects Your Interests

From our perspective as an M&A advisory firm to privately held companies, phantom stock is a more favorable method to use as an incentive to retain employees.  

It allows you to reward your key employees upon the sale of your company without being forced to disclose to them very early in the process that you are considering the sale of your business. Doing so would force you to deal with all the potential complications that may arise from that news.

Generational Equity does not provide tax and stock structure advice. Before you consider doing any sort of stock sharing plan, you need to consult with your CPA and attorney. But while talking with them, bring up the subject of phantom equity as an option. It is not widely known and has many benefits.  

If you would like to learn more about phantom equity, here are links to online sources on the topic for you:

The most important issue for you is this: be sure to grow your company with the end game in mind.  

The end game should take into account what you want to do with your business to maximize your eventual ROI (return on investment). Many of you will spend years and years building a great business. As you do so, be sure to consult with experts on the best ways to motivate and retain your employees that do not detrimentally impact you. 

Again, we do not propose to be experts in the appropriate corporate structure for you and your company. Talk to your CPA and attorney for that. We are skilled in helping business owners monetize their largest asset and find optimal buyers.  

If you are interested in eventually exiting your company and you have not developed an exit strategy, you need to attend one of Generational Equity’s M&A workshops. These are designed to help business owners learn more about their options regarding when and how to exit their companies for the most profit. 

And keep this in mind that the choices you make today regarding how to retain and motivate your employees could have a HUGE impact on you later when you decide to sell your business. Be sure to carefully weigh your options and talk to experts on these topics before taking the plunge and setting up any stock sharing program.

© 2021 Generational Equity, LLC All Rights Reserved

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Through the sale process, Generational brought in several interested buyers and we closed in about 6 months. I am so glad I accepted that invitation to the conference and could not be happier with the whole process. The team at Generational coupled with their knowledge and guidance was so valuable that in the end, I know I could never have done this on my own!
JoAnn Ellis, Owner of Fondren 5 Star Kennels
The help you provided us during each step of this process made us feel very comfortable and confident we were selecting the right approach to transition our Company.
Andy Graham, Vice President, Modern Heating & Plumbing
The most important contribution I think Ahmad made was with his personality and work ethic. He is sincere, efficient, and very hard working. He was available to me at all times, whether it was for specific detail of the negotiation or just to talk through the bigger picture. He listened, advised, and recommended, but never forced his idea or opinions. In the time we worked together, he became a valued colleague and also a friend.
Salvo Stoch, Founder and CEO of Sleeping Partners
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Larry Moore, Owner, A Company Portable Restrooms
Michael worked tirelessly, He followed every lead meticulously and urgently to make sure nothing was missed.
Robert Evans, President and CEO of Mealtracker Dietary Software
We knew it would be a difficult task to have someone really understand our business and our market, prior to researching a possible buyer, so it was imperative that we found someone of your caliber, with definite proven experience in this area.
Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
T.D., thank you so much! You are a great leader! I love how you are using your gifts and talents to better others. You are clearly a GREAT COACH! This 3 day session undoubtedly changed the future of our business, and very well may have been the sole catalyst to save my company, my health and my marriage! A genuine “thank you” from the bottom of my heart.
Bryan D. Horn, Owner, Over Under Clothing
We had the pleasure of working with Mr. Ahmad Behjati Managing Director, M&A, for Generational Equity during our acquisition of Papa's Dodge in late 2021. Generational Equity and Mr. Behjati represented and marketed Papa’s Dodge. As our primary contact, Mr. Behjati was professional in every facet of this acquisition process, conveying valuable advice most times and assisting us in every step of the process.
Rick Greene of Dobbs Equity Partners LLC
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Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
I wanted to write you a quick letter to express our appreciation and our delight on the outcome of helping us through the process of our recent sale. We are very happy with the end result, and are very happy to be able to move forward with all of our future growth plans.
Terry D. Wickman, President, Keytroller
We were represented by Michael Goss with Generational. The due diligence was grueling and exhausting, but Michael propped us up and kept us motivated throughout the process. Debi and I continued to ask each other how we could possibly make it through this process without the assistance of Michael. Michael's professionalism and knowledge is absolutely amazing, and we are so blessed to have had him by our side as we made our future dreams come true.
Bob and Debi Lee, Owners of BL Technology, Inc and BL Tl Services, LLC
Generational Equity educated and informed us – so that we could be on the upside of a good decision (to sell).
Bil MacLeslie, CEO, ipHouse
After attending a conference with GE, I decided that the value they bring would be worth the expense and as soon as I started working with them, I realized that was the right decision. When we started to get LOIs, Fred Zweifel took the lead on the communication and supported negotiations throughout the process, which got tricky as we moved forward. I learned that it can be common for companies to make a great offer then work to erode that price with their discoveries, but Fred and the GE team kept that from happening.
Caroline Connelly, CEO, OptoTest
We thank you Eric and Generational Equity making our dream come true.
Larry Moore, Owner, A Company Portable Restrooms
The process was much more involved than I expected and your help, experience and advice was a big factor in making the negotiations go as smoothly as possible.
Terry D. Wickman, President, Keytroller
I need to say an immense thank you to Don Ho for his stellar work ethic, attention to detail, and tireless effort. Also thank you to the whole crew at GE! Without you, Don could not do such a phenomenal job. We were shooting for closing and funding before the end of 2020, due to the uncertainty of the political landscape and taxes. I am happy to report we closed last week and will be funding tomorrow.
Dr. Caty J. Catron PhD, RN, VA-BC – Owner, Vic The Picc, LLC
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Bil MacLeslie, CEO, ipHouse
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Robert Evans, President and CEO of Mealtracker Dietary Software
The professionals at Generational Equity then helped develop a roadmap for enhancing the value of the firm and an evaluation report. This was completed by June 14, 2021. We then developed the Confidential Information Memorandum and put Taylor Studios, Inc. on the market by July.
Generational Equity’s professional staff helped me every step of the way. Their network and professionals are the only reason I sold my company this quickly. For me this is a once in a lifetime sale and I was unfamiliar with the process. I was able to lean on them with questions and concerns.
Betty L. Brennan, President, Taylor Studios
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Ralph Noblin, President of Noblin & Associates
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Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
Greetings Mike. Thank you for the captivating and compelling presentation you made at the Phoenix presentation last week. Over many years in business yours was the most informative and well-presented presentation, on any subject, that I have ever attended! Your energy and enthusiasm combined with your concise and captivating support of your positions with easily understood examples and data was compelling.
Pete L.
I am pleased that I was able to work with Andrew Byrd throughout this experience. From the first meeting we had in Minneapolis I felt that I was in good hands. His knowledge and expertise is second to none. He guided the process consistently throughout. I feel lucky that I was pared with Andrew and could not be happier that I chose Generational Equity to handle this major life event. Thank you Andrew and GenEq for everything!
Eric Erlandson, Owner, Action Fastenings, Inc.
Thanks to you, the entire GE team and especially Michael Goss for driving a great valuation, coaching me and driving the process across the finish line. Please let me know if there is anything I can do to support GE going forward.
Tom Currier, Former President & CEO, Rackmount Solutions
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Bil MacLeslie, CEO, ipHouse
I quickly recognized that Don was working for Sharpe Mixers above all else, and held our interests above others.
Jay Dinnison, Owner of Sharpe Mixers
I must say that I have never worked with a more driven, competent and focused individual as Don Ho.
Jay Dinnison, Owner of Sharpe Mixers
I decided to attend the conference and hopefully receive some guidance on how to structure an exit plan of my business. Upon arriving at the conference, I was so impressed with the presentation given by Generational Equity that I set a future appointment that week to discuss the possibility of selling my business with their Senior Managing Director David Robinson.
JoAnn Ellis, Owner of Fondren 5 Star Kennels
I wanted to take this opportunity to thank you for all that you have done for us. Not only did you take care of all the aspects of the sale but took extra care to make sure we knew what it looked like every step of the way. I will definitely recommend your company to anyone that is in a position to or looking to exit their business.
Shane and Johanna Kline, Owners of Vision Upfitters