Phantom Equity
A contractual right to a cash bonus tied to company value, without granting actual company shares.
Phantom equity (or phantom stock) mimics the economics of real equity — the holder benefits if the company's value increases — without actually issuing shares, ownership, or voting rights. It's paid out as a cash bonus, typically triggered by a liquidity event like a sale, calculated based on a formula tied to company valuation or share price.
It's used most often for companies that can't or don't want to issue real equity to a particular person or entity — LLCs (which have different equity mechanics than a C-corp), international employees in jurisdictions with unfavorable equity tax treatment, or situations where a company wants to offer upside without diluting the actual cap table.
Be explicit and precise in the phantom equity agreement about the exact triggering events and valuation methodology — vague or informal phantom equity promises are a common source of disputes precisely because there's no actual stock certificate or cap table entry to point to later.
Does phantom equity dilute existing shareholders?
No — because it's a cash bonus obligation rather than actual stock, phantom equity doesn't appear on or dilute the cap table, though it does create a real future cash liability for the company at a liquidity event.
Related terms
Run the numbers yourself: dilution, SAFE conversion, and fund-returner calculators.