Phantom Stock Plan
(Private Company)

Summary

This template phantom stock plan is primarily designed for use by a privately held company to incentivize employee and other service provider performance by granting awards with a value that is determined based on the company's stock value. It includes practical guidance, drafting notes, and optional and alternate clauses. Phantom stock generally represents a company's unsecured and unfunded promise to make a payment to an employee or other service provider upon certain specified events (e.g., change in control, fixed dates or termination of employment) equal to the value of a specified number of shares of the company. Alternatively, a phantom stock plan can be designed so that the value of the award is based on the appreciation in value of the company's stock, similar to a stock option or stock appreciation right. This template contains alternate clauses so that it can be used for a full-value award plan or an appreciation-value award plan. For private companies, a key advantage of granting cash-settled phantom stock rather than traditional equity awards that include the transfer of shares, such as options or restricted stock, is that it allows companies to reward and incentivize service providers without transferring illiquid shares. Another advantage in granting phantom stock is that it allows for the deferral of taxes after vesting, if properly structured to comply with the nonqualified deferred compensation rules of I.R.C. § 409A (Section 409A). Phantom programs may also be attractive to partnerships or limited liability companies (LLCs) given the relatively higher costs to implement and administer traditional equity plans for those entities. For partnerships and LLCs that grant profits interests, such entities can also implement a phantom plan that incorporates both phantom stock and profits interests (see Drafting Note to Section ). For a full listing of key content that can be used by in-house counsel to develop, revise, and implement a company's employee and third-party-related policies, see In-House Company Policies Resource Kit. For a full listing of key content covering equity incentive plan considerations, see Equity Incentive Plan Resource Kit. For an accompanying template award agreement, see Phantom Unit Award Agreement. For additional related information and resources, see Equity Incentive Plan Resource Kit. To compare state and federal laws on restrictive covenants and terminations in employment agreements, see the Employee Benefits & Executive Compensation State Law Comparison Tool. For information on stock-based compensation, see Current Legal Forms with Tax Analysis § 12.04.