EMI vs Phantom Shares

If you are here, you probably already think that giving away equity to your employees is a great idea. Well, us too!! We live and breathe employee equity programs and truly believe it is one of the best benefits you can give - mainly because there is plenty of evidence that it is a great motivation tool that really gets your team ticking! And as every founder knows, behind every great idea is a great team, you are nothing without them.

One of the many questions that commonly comes up is how best to get them involved with equity. We are strong advocates for an EMI scheme, mainly because EMI schemes come with so many benefits that a small company can use to its advantage. But what about all the other types of equity you can give away - particularly phantom shares? Given our love for the EMI Scheme, this blog is going to deep dive into what the main differences are between EMI schemes and phantom shares are - so buckle up!

Spooky, Phantom Shares

When you think of phantom, try not to think about the Phantom of the Opera, the Rolls Royce Phantom, or the Phantom Solana wallet. I want you to think of the ghost version of the phantom. Why? Because Phantom shares are like ghost shares in your organisation, they have many of the characteristics of equity ownership without being actual equity itself. Like any type of equity ownership, the owner of the equity receives value when the share price increases. How this differs with Phantom shares is that they are not actually issued equity, but instead are issued the right to a cash based payout based upon an increase in share price, with this cash payout occurring on certain trigger events. If you are a pro on EMI schemes you can immediately see some of the differences between Phantom shares and an EMI scheme.

A quick summary of the pros and cons. Starting with the pros, Phantom shares are an easy way to provide the benefits of employee equity ownership, aligning the incentive of the holder with those of the other shareholders. Given you are giving away rights, and not actual equity, your capital table remains the same as it is before. This can be a great benefit if you have a particular reason you want to keep a simple capital structure. Because it is a right and not bound by the requirements of the EMI scheme, it also has greater flexibility in both the conditions you can offer it under, and the types of companies that can offer it. When looking at cons, unlike an EMI scheme the incentive is no longer tax advantaged. Consider it more treated like a cash bonus, and thus taxed in the same way. Finally, given you actually have to pay it out in cash, one of the major drawbacks is that when the triggering event happens (such as an employee leaving on good terms, or an exit event, or other) then the company has to pay that amount owed to the Phantom shareholder. If you don't have the cash available, this can cause a bit of a drama, and as we all know many start-ups already have a cash problem!

So phantom shares look like a great way to incentivise your employees in a simple and efficient way. The main problem is that it doesn't solve the cash problem that start-ups have - leading to further cash flow headaches in the future.

EMI scheme vs Phantom

So, to Phantom or not to Phantom, that is the question.
We can see that phantom shares are a quick and easy way to issue shares to your team without much administration costs, and enables you to retain ownership of the company within the current shareholders. This could be ideal for more mature businesses that do not have severe cash restrictions or want to maintain ownership to a small set of shareholders.

EMI schemes are built for high-growth start-up companies that are in their early stages of development, but have the potential to grow into something amazing. The scheme allows you to provide essentially the same benefits to your team, but also allows the payout in the future to be tax advantaged (so both good for you and the employee!). Some guidance definitely needs to be had with an EMI scheme, to ensure you get things like the structure and vesting schedule right, but these administrative hurdles are a minor upfront investment into a major payoff later.

Time for a Pomelo?

And obviously we are here to help - we focus on providing start-up team members the best employee equity package they can receive, and particularly are focused on providing EMI schemes to high growth start-up companies in the United Kingdom. We do all the administration for you ensuring the scheme is set-up properly, and we also dive into your team providing one-on-one education and resources to ensure they also understand how great of a benefit they have got. Even if you’re not quite ready to set up your scheme now, give us a call and we can talk you through our process so you know what to expect when you’re ready to motivate your team with equity.