Phantom Shares are an attractive solution when it comes to involving employees in the company’s success. For example, when selling a GmbH, employees receive a share of the proceeds via the phantom shares assigned to them. This profit share is then paid out as a bonus. Phantom shares are often used in start-ups or companies with innovative technologies. Because one advantage of phantom shares is that they are also suitable for retaining employees who are particularly important for success. Shareholders can often provide up to 10% of the company shares for phantom shares. Normally, an employee can expect a participation of 0.25% to 0.75%, with particularly important employees up to a participation level of 2.5%.

Furthermore, phantom shares have the advantage that they have no effect on the liquidity of the company during the growth phase of the company. In addition, phantom shares have the advantage over real participations that they are transferable without notarization. The shareholders retain full control over the company. In this way, all shareholdings can be sold in bundles without the shareholders with small shareholdings being able to influence the purchase price.

Phantom shares or phantom stocks are agreements between companies and employees through which an employee receives an indirect – or virtual – participation in the success of the company as a bonus. In addition to these names, the German-language synonym Phantomaktie is also used. In addition, the Anglo-Saxon acronym ESOP refers to the program by which employees can participate in the company’s success via phantom shares, with ESOP standing for “Employee Share Ownership Plan”.

This refers to a quantity of virtual shares provided by the shareholders of the company, which are due to the employees participating in the ESOP program instead of the shareholders in the event of a sale of the shares. This also gives employees a share of the company’s revenue. Less common are cases where phantom shares entitle you to participate in a dividend distribution or other profit sharing. In any case, the provision of phantom shares corresponds to a fiduciary management of future rights on the profit of a company.

Phantom shares motivate employees

One of the reasons why shareholders voluntarily renounce a share of the proceeds of their company for the benefit of their employees is that they create an incentive for their employees to participate in the success of the company. Although this motivation for the employees usually pays off only after the sale of the company, it is also possible to strengthen the belonging of particularly important employees. This can prevent, for example, a particularly qualified employee, for whom there may be no adequate replacement in the long term, from leaving the company. Especially in young companies with equally young employees, this also strengthens the emotional connection of employees to the company, because they get the feeling of being particularly active in its development. In doing so, they make it their own concern, which also significantly increases their sense of responsibility and motivation.

As a rule, employees agree on a participation through phantom shares in the range of 0.25% to 0.75% of all shares in the company. However, particularly important employees, for example in management, can also be considered with phantom shares up to a level of 2.5%. Often, shareholders reserve an interest of up to 10% of all shares for such ESOP programs.

Assuming, for example, that a GmbH is founded with a share capital of EUR 25,000 and that it grows to a goodwill of EUR 10.025,000 within the next ten years until its sale, if the employees participate in the order of 10% of the profit from the sale of the company, EUR 1,000,000 would be distributed to them via phantom shares. Thus, an employee already receives a bonus of EUR 25,000 with a participation of 0.25% through his phantom shares. However, the profit share is also subject to taxation.

4. Where can phantom shares be used?

Especially for start-ups in industries with new technologies, participation via phantom shares can be a tempting way to motivate employees to perform at their best and to bind them to their own company. In addition, phantom shares are easily transferable to the employee via an employment contract with the company. This eliminates, at least for a GmbH, the need for a notarial deed, which would otherwise be necessary for the transfer of real shares of the company. It is just as easy for these regulations to be reversed at any given time. In addition, phantom shares also offer the advantage of a financial and thus liquidity-saving alternative to many other employee compensation options. Especially in the early phase of a company, in which the financial resources for remuneration of employees may be available to a lesser extent, this can make sense.

5. regulations and special features for phantom shares

Thus, phantom shares are a promise to participate in the success of the company. Usually, the corresponding regulations are included as clauses in the employment contract. Since the management of a company is entitled to sign such an employment contract, but the virtual participations provided for this purpose must be approved by the shareholders, a shareholder resolution is first required.

In this context, the assessment of another aspect should also be included in the decision. The virtual participation of employees in a corporation may conflict with the principle of capital conservation. The question of whether management sees a concrete advantage on the part of the company in the virtual participation of employees also requires a positive answer. Only then is this compatible with the principle of proper and conscientious management. Otherwise, the responsible manager may be liable here. But there are various instruments with which you can make provision for a variety of eventualities.

Thus, an employment contract in terms of virtual participation via phantom shares should also include a large number of regulations. For example, it must clarify what happens in the case of an early departure of the employee with his shares. Or what influence, for example, maternity protection or other interruptions have on virtual participation. However, the eventuality of a partial sale of the shareholdings should also be compatible. The same applies to protection against capital dilution.

Phantom Shares: Shareholders retain control

Now phantom shares have the advantage over real employee shares that the shareholders retain all control over the voting rights in the company. This allows them to simultaneously involve employees in the company’s success without granting them co-determination or other opportunities for influence. For example, the decision to sell the company is solely in their hands.

Negotiation of the selling price is also reserved for the true shareholders. For example, if an employee with a real shareholder interest of 1% were involved in the sale of the company, he could use his position to overstate his share. However, because in most cases a buyer wants to acquire a company 100%, the main shareholders might be tempted to spend the difference from their own resources to ensure the sale. When providing phantom shares, on the other hand, everyone gets the same value per share.