Equity, Stock Options and Phantom Shares: A Guide to Understanding the "Gifts" CEOs Give Their Teams

With the arrival of the holiday season, many CEOs and directors take the opportunity to "gift" their teams something more valuable than a traditional present: participation in the company's success. However, terms like equity, stock options, and phantom shares are frequently used without everyone being clear about what they really mean.

Knowing the terminology is good, but understanding what we're talking about is essential. In this article, we explain these three forms of capital participation and their practical differences, so you can make informed decisions whether you're a founder or part of the team.

Equity: Being a Real Partner

Equity is the most direct form of participation in the company's capital. It's the closest thing to receiving a real slice of the pie: not a bite, but a tangible part of the business.

When you receive equity, you enter directly into the company's capital. This means that:

• You have real rights as a partner
• You assume responsibilities as part of the project
• You are officially part of the corporate structure
• You participate in strategic decisions according to your percentage

Stock Options: Being a Partner... If You Exercise One Day

Stock options are different. Here you're not given the participation directly, but rather a right (option) to buy shares in the future at a price set today.

It's like having a voucher to buy something valuable in the future at today's price. If the company grows and its value increases, that voucher can be worth a lot. If the company doesn't grow as expected, it remains a "we'll see."

Stock options are useful because:

• They allow retaining and motivating talent long-term
• They don't touch the cap table from day one
• The employee only becomes a partner if they exercise the option
• They can have vesting conditions (progressive acquisition)

Phantom Shares: Participating in Success Without Being a Partner

Phantom shares work differently. Here there's no real participation in capital, nor an option to buy. Instead, there's a bonus calculated based on how the company's value evolves.

With phantom shares:

• You don't enter the company's capital
• You don't have voting rights
• You don't get diluted in future rounds
• But if the company does well, you receive a proportional bonus
• If there's an exit (sale or IPO), you also participate in the benefit

Which is Better? It Depends on Context

The million-dollar question is: which of these three options is better? The honest answer is: it depends. It depends on for whom, for what, and at what stage your startup is.

What's important is not to "gift" things that people don't understand (it happens more than you think) and to design an incentive system that truly adds value to both parties: company and employee.

For Founders: What to Consider

• Equity: Use it for co-founders and key strategic profiles. It's the strongest commitment.
• Stock Options: Ideal for first employees and talent you want to retain. Allows flexibility in the cap table.
• Phantom Shares: Perfect for broader teams or when you want to incentivize without modifying the corporate structure.

For Employees: What to Understand

• Equity: You're a real partner. You have rights and responsibilities. It's the most valuable long-term.
• Stock Options: You have a future right. Assess if the exercise price is reasonable and if you'll be able to exercise it.
• Phantom Shares: You participate in success without being a partner. Simpler, but also more limited.