What is Phantom Stock Agreement Drafting?
A phantom stock agreement is a contract between a business owner and an employee. It gives employees the benefits of acquiring company stock without transferring equity to them. It is commonly used to motivate key employees.
Since a cash payout tied to the value of the business is granted to the employee, who essentially receives the right to a future cash payment, the agreement must be clear and specific to avoid disputes.
To draft a phantom stock agreement, read the rest of this article. We’ll explore key terms to include in the agreement, how to draft it, and how hiring a qualified lawyer can assist you with the contract-drafting process.
What Key Terms Should You Include in a Phantom Stock Agreement?
A phantom stock agreement should include core components such as the following:
- Phantom units. The agreement must specify how many phantom units (artificial shares that represent stock ownership) the employee gains.
- Vesting schedule. This specifies milestones that need to be met before the employee receives the phantom units.
- Valuation formula. This explains how the underlying units are priced.
- Trigger events. There are specific events that will initiate payouts. These need to be included for clarity. Trigger events can include the business being sold or employee termination.
- Payouts. The agreement must specify if this will be an installment or lump sum.
- Forfeiture. This explains what happens should the employee leave the company before their units are vested. For example, perhaps they will keep what has already vested.
- Confidentiality. To protect the company’s information and financial details shared between parties, a confidentiality clause must be included.
- Governing law. The agreement should specify the governing law and jurisdiction. This will help parties to resolve disputes that arise, such as via mediation or arbitration.
What Additional Information Should You Include in a Phantom Stock Agreement?
Besides key terms, your phantom stock agreement should also establish clarity on various aspects of the arrangement. Here’s a rundown of some important aspects.
Establish a Purpose
You should clearly explain why the employee is being granted the award, such as to reward them for their performance in the company.
Explain Valuation
The agreement should specify how the company’s value is determined for final payouts, such as if an independent valuation is required or fair market value is determined by the board.
Clarify Payments
You should specify what triggers a payout so that employees understand when to expect it, such as if they retire or if the company is sold. The agreement should also specify if the payment is going to take the form of company shares or cash.
Detail Lack of Ownership Rights
To prevent ownership disputes, the phantom stock agreement should clearly state that the employee doesn’t receive any ownership rights from the deal. Be specific, such as by explaining that they don’t gain voting rights, inspection rights, or shareholder rights.
You could also mention in the agreement what rights the employee does gain, such as the right to receive cash payouts or dividend equivalents.
Consider Future Changes
To ensure your agreement is comprehensive, you should specify what happens if there are changes to the business, such as if the company gets acquired. For example, perhaps in this situation there’ll be immediate vesting or cash-out at closing.
How Does a Lawyer Help You with Phantom Stock Agreement Drafting?
Since a phantom stock agreement can be tricky to navigate if you don’t have experience in using or drafting it, a qualified lawyer can help you with it. Here’s what a lawyer can do during the drafting process so that the contract is legally-sound, clear, and detailed.
- A lawyer will draft an agreement that reflects your specific company’s ownership structure and goals.
- They’ll help you avoid expensive legal mistakes by writing the agreement in clear, specific terms.
- They’ll comply with all applicable laws and regulations. This reduces the risk of non-compliance.
- They’ll define all payment and vesting terms for clarity and to prevent disputes.
- They’ll protect your interests, such as with forfeiture and confidentiality provisions.
- They’ll review a phantom stock agreement that you’ve already drafted, which will give you peace of mind that all its terms are clear and valid.
- They’ll save you time and money. Hiring a qualified lawyer to draft or review your agreement will prevent higher costs in future, such as those required for resolving expensive legal disputes.
Where to Find a Lawyer for Phantom Stock Agreement Drafting
Finding a lawyer to draft your phantom stock agreement doesn’t have to be a time-consuming process. Online legal platforms make it easy and convenient to do wherever you are.
ContractsCounsel is one of the largest online legal marketplaces that gives you access to a curated network of vetted lawyers. Since all the lawyers you can hire from the platform have experience in drafting legally-sound contracts, they’ll be able to assist you with drafting a phantom stock agreement.
Here are the steps to follow if you want to hire a vetted lawyer on the ContractsCounsel platform to draft your phantom stock agreement:
- Go to the ContractsCounsel marketplace.
- Post your project for free. You should try to include a few details to help you find the most suitable lawyer, such as the agreement's purpose.
- Receive multiple bids from lawyers directly on the platform who have the skills to help you.
- Review the lawyers’ profiles. Decide which lawyer to hire by reviewing the information on their profiles. This includes their location, client ratings for previous projects, expertise, and credentials.
- Connect with a lawyer you think is best suited to your requirements and hire them to draft your phantom stock agreement for a flat fee.
