From an employee perspective, phantom stock has a number of advantages over more traditional stock options. The MARE (Modern Agreement for Rewards and Equity) offers several tools that help you keep your key employees, including our unique framework for phantom stock, designed by lawyers and customized by small businesses. The document is a great representation of the best parts of phantom stock.
The MARE phantom stock agreement offers a unique benefit to small business employees that is far more simple and affordable than alternatives. While it doesn’t represent actual equity in a business, it is a valuable benefit with the potential for meaningful upside for employees.
Zero upfront costs
Unlike regular stock options, which often require employees to buy shares at a specific strike price, the MARE doesn’t require any sort of upfront purchase. Instead, it works as a cash bonus that is linked to a future value of the company, usually at the time of sale.
Simpler tax treatment
Phantom stock is taxed as ordinary income at the time of payout, as opposed to when it’s granted. On the other hand, real stock can have more favorable but also more complicated tax implications.
Easy to understand
Similar to the comparative simplicity of the tax treatment, once you understand that the MARE is simply a promise for future cash, the concept of phantom stock becomes much easier to understand as opposed to vehicles like restricted stock units or employee stock purchase plans.
A true stake in the business
For many companies, a phantom equity plan is truly the only way to grant a version of employee ownership. This can be due to company structure and finances, among other reasons. The MARE provides a simple way to directly align employees’ financial interests with company performance, as their potential payout increases with the company’s future value at the time of sale.
Flexibility
The MARE is designed to be flexible; a small business owner might choose to create a plan that aligns with specific company goals or employee preferences. For example, phantom equity can generally be tied to milestones and can be tailored to employee tenure, performance, role, and more. This sort of flexibility can’t be found in typical stock plans.
