Grant of Phantom Based Options and Benefits to Employees/Service Providers 

Phantom options are options that are granted pursuant to an agreement between a company and an employee/consultant/service provider, entitling the grantee to a monetary payment at a certain time in the future , reflecting the increase in the market/share value of the company, while it is not accompanied by granting any equity or rights to shares (and/or other securities) of the company.

The consideration is determined based on the market value of the company’s share. For example, if the employee was awarded 100 phantom options while the share price was US$10, then, if the share price will increase to US$20, the employee will be entitled to US$1000 = 100 * (20-10).

In such manner a company may award an employee or a service provider a consideration derived directly from an increase in the share price and market value of the company, without entitling them to any voting rights, right to appointing directors and other rights underlying the ownership of share s or options of the company.

In private start-ups, in which the valuation of the company is usually determined in connection with financing rounds, the grant of phantom option will depend mostly upon an “external” Exit. such as an IPO or M&A with a third party, in which the valuation is closer to the market value (the price determined by two unrelated parties). However, in privately held start-ups, the valuation of the company is the result of an agreement between the two sides reflecting the expectations of weach party rather then the true market value; in such companies,  the application of a phantom based benefit plan may be difficult or unfair. it is also important to note, that the reward is paid in cash money and the company is required to allocate financial resources for such purpose, while in stock oriented benefit plans the cash flow of the company is not affected.

Public companies that want to avoid the complication of change of in the capital structure of the company, diluting existing shareholders and increase in the number of the shareholders, the phantom options mechanism is simply and easily applicable, and the advantages are clear.

The benefits of Phantom-based compensation plans are:

• Flexibility, given that there is no need to issue stock options which require internal procedure s and a resolution of the Board.
• Avoid diluting the holdings of the shareholders.
• The compensation is in cash.
• The reward is a deductible expense by the company.
• It preserves all the advantages in allocating stock options or securities: reqarding the employee for the increase in market value of the company, making the bond between employer and employee stronger, and creating an incentive for the employee.service provider to continue its relationships with the company for a longer period of time.

The Disadvantages

• Difficult to implement in private companies, and is conditioned on an “external” Exit event  such as public offering and a sale to a third party.
• The company is required to pay a monetary payment, which affects its cash flow .
• An employee may not benefit fro the reduced “capital gain” tax scheme under section 102 of the Israeli Tax Ordinance.