Phantom Shares & Stock Options: two key tools for retaining and attracting talent for startups

Human capital is the DNA of any organization and one of the drivers to boost its success. It is for this reason that talent acquisition and retention tops the list of priorities for startups.

For most startups in their initial stages, this represents one of their biggest challenges, as their weak financial situation generally does not allow them to offer salaries or conditions comparable to those of large companies. However, there are formulas that allow them to compensate for this handicap, generating a win-win relationship and saving the company the disbursement of salary costs in the short term.

We talked about it in the last talk CEO2CEO>Questions without a filterorganized together with Netmentora Catalunya. A session in which we delved into Stock Options y Phantom Sharesthe two most widely used variable compensation systems in startups to build employee loyalty and align their interests with those of the company.

For this purpose, we count on the experience of Pablo Mancíaco-founder of Delvy y Quim Zurano GallartCEO of Paymefy. Stay to read this post to learn about these two tools, discover their advantages and disadvantages and understand why they are key in retaining and attracting talent for startups.

What are Phantom Shares and Stock Options?

Firstly, Stock Options are a compensation supplement, in addition to the base salary, that grants employees the right to purchase shares of the company during a limited period of time (vesting period) —usually 3 to 5 years— and at an exercise price, that is, lower than the market value. In essence, they are offered the possibility of becoming shareholders of the company with special conditions.

On the other hand, the Phantom Shares compensation system provides an economic right linked to the shares or participations of the company, generally 5%. The calculation of the amount to be received will be determined based on the difference between the value of the shares or participations on the date of assignment and that presented at the time of liquidation. The operation is similar to that of Stock Options: in order not to lose the right to collection, the employee must achieve the agreed objectives and exceed the vesting period, this last point being the key that guarantees their loyalty.

It is important to keep in mind that since they do not perceive political rights, the employee will not be part of the General Meeting of partners. It is for this reason that Phantom Shares are also called “phantom shares.”

As Pablo Mancía pointed out, companies can implement different Phantom Shares plans during their development. 

"The most common thing is that, with the aim of offering something tangible to people who have collaborated in the project since the beginning, the startup establishes a Phantom plan during an early stage or at the time when it is raising the first round of funding. round of funding."

Phantom Shares VS Stock Options: which is the best option for attracting and retaining talent for startups?

As you can see, both are great instruments to increase the motivation and commitment of the key employees of the project. However, although these are two incentive plans used to achieve the same objective, there are some aspects that favor the use of Phantom Shares. We detail them below:

• Firstly, despite Stock Options being the most used option in the North American startup model, their high taxation in personal income tax makes their implementation in Spain difficult. It is due to these tax issues, which cause more disadvantages than advantages, that Phantom Shares have positioned themselves as the most used model in the country.
• On the other hand, in the case of Stock Options, one of its main disadvantages is that the entry of new partners also implies a change in the structure of the share capital, causing the dilution of shares of the old partners. In contrast, as mentioned above, Phantom Shares do not modify the situation of the company's partners, so the decision-making power remains with the original shareholders. This will avoid disputes and favor the attraction of future investors.
• The Phantom Shares system is also usually more convenient for employees, as this system does not require them to make any financial outlay, which is a requirement of Stock Options, regardless of whether the value of the shares is lower than the market value.

Despite presenting more advantages than Stock Options, if you want to opt for Phantom Shares you should bear in mind that one of its main problems is usually caused by the flexibility of its contracts. In this way, to avoid future conflicts it is essential that it is clearly established how the valuation of the shares will be carried out when the time comes.

Case study: Paymefy and Phantom Shares

As its CEO told us, Paymefy arose as a result of a pivot of the company QIDS. It was during the development of this previous project that the startup team identified an opportunity in the payments field.

Pivoting from one project to another carries the risk of losing the partners you had already secured. For this reason, they created a Phantom Shares plan designed to reinforce the weight of the founders and incentivize them to continue being part of this new adventure.

Currently, Paymefy's objective is to establish a new plan to retain and reward talent, which will generate a commitment from the entire team to the success of the startup.

«I want to implement a plan that motivates any member of the Paymefy team to row with me to achieve the company's objectives, knowing that every time they do so, they will also be creating value for him/her.» Quim Zurano, CEO of Paymefy

If you have been wanting to know more about the topic, here you can view the full video of the round table CEO2CEO: with Delvy & Paymefy  held at Aticco Bogatell.