Retaining Key Employees: “Phantom” Equity Benefits Checklist
Establishing a phantom equity plan is one of the most popular ways to incentivize and retain key talent while permitting the founders/owners to retain ownership and control. Equity Participation Units or Equity Appreciation Units give employees a stake in the growth and eventual sale of an Agency. Equity Participation Units (EPUs) have been used on a fairly widespread basis in the Advertising Industry.
What exactly is an EPU?
EPUs are a contractual right to receive a cash payment on the occurrence of an event - normally a sale or merger of the Agency or the increase in the net worth of the Agency over time on the termination of an employee’s employment. EPUs enable key talent to share in the upside growth of an Agency by contract rather than by being granted stock or stock options. EPU agreements often contain restrictive covenants that prevent employees from raiding clients or other employees and provide an incentive for employees to agree to these restrictions.
What are some of the advantages?
[ ] Keeps actual equity and control with a limited number of shareholders.
[ ] EPU holders do not have minority shareholders’ rights including access to books and records and financials statements.
[ ] EPU Agreements are usually much less expensive to adopt and administer than Option Plans.
[ ] No current income tax obligation to EPU recipients.
[ ] No need to consider bonusing the money to pay the tax as would apply with bonusing stock.
[ ] No need for the employee to go into debt or use after tax dollars as in purchasing stock.
[ ] No need to issue stock or otherwise complicate corporate record keeping.