| Critical Success Tip | | | | value, along with dividends and other distributions. |
| To use stock as an employee retention vehicle, | | | | There is no taxable income for the holders of |
| require a holding period before the shares can be | | | | phantom shares until they are "redeemed" by the |
| sold. Remember to retain the right of first refusal | | | | employee. |
| on any sale - you don't want those shares finding | | | | There are two types of phantom stock plans, |
| their way into unfriendly hands. Plus, require the | | | | "growth" and "basic". Under the growth plan, at |
| shareholder to offer the shares for buyback in | | | | redemption, employees receive an amount equal |
| the case of termination. (Offer - don't require | | | | only to the appreciation in the share account. |
| your company to buy them.) Lastly, if you don't | | | | Under a "basic" plan, employees receive the total |
| want to share decision-making power, create two | | | | of the appreciation, plus the original value of the |
| classes of shares: voting and non-voting. | | | | shares. |
| Non-Qualified Stock Options | | | | Critical Success Tip |
| Non-Qualified Stock Options are a powerful and | | | | Phantom shares are the equity vehicle of choice |
| efficient way to keep your employees. An option | | | | when you don't want to dilute either ownership or |
| holder has the right to purchase shares in the | | | | control, or when you have a Subchapter S and |
| company at the "grant price", which is typically | | | | can't exceed the maximum of thirty-five |
| the current share value. As your company gains in | | | | shareholders. Establish a vesting period for |
| value, the value of the option rises. Options often | | | | phantom shares: grant the shares, but require a |
| have a vesting period before they can be | | | | minimum holding period. If the employee leaves |
| "exercised" to purchase shares, requiring | | | | before the holding period expires, he or she |
| employees to stick around and keep contributing | | | | forfeits the value of the shares. You can also |
| to the company. A benefit for employees comes | | | | establish a payout period, after which time you will |
| from the tax-deferral feature: there is no tax due | | | | redeem the phantom shares for cash. In other |
| until the option is exercised. Importantly, options | | | | words, your people don't have to leave to cash in. |
| themselves do not carry voting rights. | | | | Valuation |
| Critical Success Tip | | | | For public companies share value is determined in |
| Since you can grant non-qualified options on a | | | | the marketplace. Private companies must engage |
| totally discretionary basis, use them to reward | | | | in some kind of valuation process, which is outside |
| performance on individual, team and company | | | | the scope of this article - but a few "success |
| levels. Also, establish the vesting period to occur | | | | rules" apply. |
| on an "stair-step" basis - for instance, 50% vest | | | | 1) Perform the valuation at regular, published, |
| in two years, the second 50% vest in another | | | | intervals - at least once per year. |
| two years. This type of structure gives your | | | | 2) Document your valuation process so that your |
| employees the "choice" to leave, but holds out a | | | | shareholders can understand it. |
| significant carrot for staying. | | | | 3) Establish a capital reserve to enable share |
| Phantom Stock | | | | redemption, and publicize it. |
| Phantom Stock is an accounting fiction which | | | | Following these three rules will increase your |
| enables top people to partake of increases in | | | | employees' sense that their shares (and options) |
| company value. Unlike "real" stock, phantom stock | | | | have real value, and will have them want to |
| does not convey any actual ownership in the | | | | remain and continue participating in the upside. |
| business. A phantom share is a credit in an | | | | Information on salary wages, salary vs hourly , |
| employee account for an amount equal to the | | | | hourly wages can be found at the Knowledge |
| value of your company's "real" shares. Over time, | | | | Galaxy site. |
| the account is credited with changes in share | | | | |