Human capital is the DNA of any organization and one of the driving forces behind its success. It is for this reason that the attracting and retaining talent at the top of the list of priorities for startups.
For most startups in their initial stages, this represents one of their greatest challenges, since 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?
First of all, the Stock Options are a remuneration supplement, in addition to the base salary, which grants employees the right to purchase company shares or stock for a limited period of time (vesting period) - usually 3 to 5 years - and at an exercise price, i.e. below market value. In essence, they are offered the possibility of becoming shareholders of the company under special conditions.
On the other hand, the Phantom Shares remuneration system is Phantom Shares provides an economic right linked to the shares or units of the company, generally 5%. The calculation of the amount to be received is determined on the basis of the difference between the value of the shares or units on the date of allocation and their value at the time of liquidation. The operation is similar to that of Stock Options: in order not to lose the right to payment, the employee must achieve the agreed objectives and pass the vesting period. vestingThis last point is the key to ensuring their loyalty.
It is important to bear in mind that since the employee does not receive political rights, he/she will not be part of the General Shareholders' Meeting, the employee will not be a member of the General Meeting of Shareholders.. It is for this reason that Phantom Shares are also referred to as "phantom shares".
As pointed out by Pablo Mancíasaid, 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 talent attraction and retention option for startups?
As you can see, both are great tools for increasing the motivation and commitment of key project employees. However, although they are both incentive plans used to achieve the same objective, there are some aspects that favor the use of Phantom Shares. aspects that favor the use of Phantom Shares. These are detailed below:
- Firstly, although Stock Options is the most widely used option in the U.S. startup model, its high taxation in terms of high personal income taxation makes it difficult to implement in Spain. It is due to these tax issues, which cause more disadvantages than advantages, that Phantom Shares have positioned themselves as the most widely used model in the country.
- On the other hand, in the case of stock options, one of the main disadvantages is that the entry of new partners also implies a change in the share capital structure. change in the share capital structure, causing the dilutionThis causes the dilution of the shares of the old partners. On the other hand, as mentioned above, Phantom Shares do not change the status of the company's partners, so that the power of decision remains with the original shareholders. This will avoid disputes and will favor the attraction of future investors.
- The Phantom Shares system is also often more convenient for employees, as it does not involve any financial outlay for them. financial outlayThis is a requirement of stock options, regardless of whether the value of the shares is below market value.
Despite having more advantages than Stock Options, if you want to opt for Phantom Shares you should bear in mind that one of their main problems is usually caused by the flexibility of their contracts. flexibility of their contracts.. Thus, in order to avoid future conflicts, it is essential to establish clearly 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 area.
Pivoting from one project to another entails the risk of losing the partners you have already acquired. This is why they created a Phantom Shares plan to reinforce the weight of the founders and encourage them to continue to be part of this new adventure.
Currently, Paymefy's goal 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 Paymefy team member to row with me to achieve the company's goals, knowing that every time he/she does so, he/she will also be creating value for him/her."Quim Zurano, CEO of Paymefy
If you wanted to know more about the topic, here you can watch the full video of the CEO2CEO: with Delvy & Paymefy roundtable held at Aticco Bogatell.