The Anglo-Saxon term Vesting means a regulation about duration and time, according to which, for example, a contractual agreement enters into force. Thus, vesting has an important function in connection with phantom shares. Because the employee who receives a virtual participation in the company via phantom shares can only exercise his rights to the company's success after a fixed period of time has elapsed during which he worked for the company.

However, if the employee voluntarily leaves prematurely, then his or her entitlement to the virtual profit sharing can partially or completely expire. They call it a bad-leaver. This also applies if he has to leave the company for a justified reason. On the other hand, the employee can negotiate contractually that in the vesting period the amount of his virtual participation increases depending on time. In addition, the contract may include a clause that determines the amount of phantom shares that the employee is still entitled to upon regular termination by the company. In the latter case, there is talk of a Good-Leaver.

If employees are virtually involved in the success of the company via phantom shares, this takes place in the vast majority of cases only after a previously negotiated period of time has elapsed. Alternatively, the achievement of certain goals can act as a condition. After all, virtual participation via phantom shares is an obligation on the part of the company, with which it wants to retain the employee as comprehensively as possible in return, so that it can benefit from its expertise for a correspondingly long time. Of course, phantom shares also serve to motivate the employee. In particular, the integration into the hoped-for success of the company can inspire an employee to achieve maximum performance in the development process of a new company. In other words, the promise to the employee applies here: the greater your performance in building the company, the greater your share of the profit should be.

Vesting at Phantom Shares as reinsurance

Now that is often a matter of motivation. Especially in the initial phase of a new company, many situations can occur that can call into question a further participation of the employee. Reasons that lead to an early departure of the employee, there may be many. But should the employee, even though he had basically only a small share in the development and thus in the success of the company, then immediately with the full package of phantom shares from the company? It is clear that hardly any company can take this risk. So the employment agreement, which grants the employee the virtual participation via phantom shares, also contains clauses that regulate such or similar eventuality. It determines, for example, when the employee is entitled to the full right to the phantom shares. For such a regulation, the Anglo-Saxon term vesting is used.

Now, of course, the question is allowed, which criteria should actually decide whether an employee should receive his right to the intended phantom shares when he leaves the company. For this you can make a distinction between so-called Good-Leavers and Bad Leavers. Employees are to be regarded as good-leavers if they leave the company without their own influence. In contrast, Bad-Leavers are those employees who bring about the exit through their own actions or otherwise indirectly.

3.1. Vesting at Phantom Shares: Good-Leavers

Good-Leavers are employees who basically leave the company without their own drive. Since the vesting of phantom shares in such a case usually means a reduction of the entitlement to the profit-sharing, employment contracts with regard to virtual participation contain clauses that act in favour of the employee. This gives him a right to the phantom shares. For example, this is possible in the event of an unforeseen but still regular termination by the company. In this case, the settlement basically takes place as in the case of a severance payment. But also a serious illness or even the death of the employee can be the reason for an early claim to the success share in the agreement. In fact, phantom shares are transferable by inheritance.

Often, however, the purpose of vesting in phantom shares is different. Because via vesting you can contractually stipulate a successive increase in the claim to fulfill the profit share. This allows you to determine, for example, a staggering of the phantom shares, which the employee is entitled to depending on time or on the achievement of certain goals. These vesteted phantom shares are therefore safe for the employee. All other virtual investments that are contractually assigned to the employee have yet to be earned by fulfilling the criteria still associated with vesting.

3.2. Vesting at Phantom Shares: Bad-Leavers

Now a company is also interested in making arrangements in the event that the employee leaves the company on his own initiative. So you negotiate with him about the time span and the framework conditions that affect the occurrence of such an eventuality with consequences in relation to his phantom shares. Because if he leaves the company at his own request within the contractually stipulated time, it should be understood that the company could benefit less than originally planned from the work of the employee. The comparison to a conventional penalty is obvious.

Such provisions are also understandable because phantom shares are intended to bind employees to the company who are particularly important for its success. Therefore, contracts for the granting of virtual participations also contain so-called cliffs. This means conditions that must first be met in order to claim the phantom shares. Such cliffs are therefore comparable to the probationary period, within which you already have a holiday entitlement, but can only redeem after the deadline.

However, an employee is considered a bad leaver even if his actions or omission leads to a situation that makes it impossible for the company to continue to employ him. Even then, the claims that the employee has against the company due to the phantom shares, partially or even completely – depending on the contractual agreement.