Phantom Shares: The Ideal Incentive for Startup Employees

Many startups find themselves with the need to attract talent, motivate and retain it, especially when they still do not have many financial resources. Currently, there are several mechanisms to get that incentive, such as giving shares to employees or paying a fee in kind.

Today we are going to introduce another way to attract talent and prevent it from going to another company: Phantom Shares. If you did not know them, be sure you will begin to consider them.

What is a Phantom Share?

The Phantom Shares are an incentive system based on the revaluation of some theoretical actions of the company in which the social capital is divided. Its value is equivalent to that of the real shares and it is usually agreed that, after a certain date, the employee will receive the theoretical amount of the revaluation on those shares. The bonus is calculated based on the difference between the value of the company’s shares at the time, in theory, they were delivered (or a value agreed upon) and the value of those shares at the time of collecting them.

They are not usually offered to all employees of the company, but rather to managers and those workers who are considered to be key for the progress of the company.

It should be noted that these are not shares or participations themselves. That is why they are called phantoms.

Advantages of Phantom Shares for SMEs and Employees

On the one hand, the Phantom Shares are very attractive for companies that plan to grow in the coming years and still do not have many resources, as is the case of the majority of startups. For small companies, there is no cost until the payment of phantom shares is done, while employees are loyal to the economic interests of the company and strive to increase its value and, thus, receive a higher amount.

On the other hand, the Phantom Shares do not convert the beneficiary into a partner but they give him the main advantage of common shares: economic rights. That means that they are not regulated as capital gains, as shares are.

How are the Phantom Shares taxed?

The Phantom Shares are not subject to taxation at the time of the concession, since at that time they are only collection expectations. When the beneficiary receives the corresponding price, it must be taxed. It will do so as general income in the Personal Income Tax (IRPF), while the company must make the corresponding withholding on the salary of the employee.

This remuneration formula does not have a specific figure in Spanish legal regulation, which means a lot of flexibility when generating rules and contracts. If you are part of a Small Company and would like to know more about how to carry out an incentive through Phantom Shares within the legal framework, contact our tax advisors in Barcelona for a entrepreneurs and startup consultancy.


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