What is Phantom Stock Agreement Review?
A phantom stock agreement is a legal contract between an employee and business owner to give the employee company stock without physically transferring equity.
If you’ve had a phantom stock agreement drafted, you’ll need to review its terms to ensure they’re accurate and avoid misleading information which could result in disputes.
Read the rest of this article to explore key sections to review in a phantom stock agreement, additional tips for conducting an in-depth review, and how a lawyer can assist you with the review process.
What Key Sections Should You Review in a Phantom Stock Agreement?
A phantom stock agreement usually contains the following core terms that must be scrutinized.
- Phantom units. This term refers to how many phantom, or artificial, shares the employee gains.
- Vesting schedule. This refers to milestones that need to be met before the employee receives the phantom units.
- Valuation method. This section needs to provide clarity on how shares are valued, such as by stating if the company uses an independent appraisal to determine the value. It must be specific to prevent payout conflict.
- Trigger events. Payouts will be triggered by certain events that must be defined in the agreement so there’s no confusion over when payouts will be received. Common trigger events include a company sale or acquisition.
- Transfer restrictions. There might be certain limitations, such as that the units can’t be sold.
- Payout form and timing. The agreement must specify if the payout will be an installment or lump sum, and mention when payouts will be made.
- Governing law. The agreement should specify the governing law and jurisdiction. Should disputes arise, the agreement must include a dispute-resolution method such as arbitration or mediation.
What are Tips for Reviewing a Phantom Stock Agreement?
When reviewing a phantom stock agreement, you should consider some important aspects.
Clarify Payment Milestones
If payouts are tied to performances, the agreement must clarify exactly what company or individual metrics are required. For example, this could mean that completing a project or achieving specific revenue growth has to be completed.
When reviewing this section, it’s important to consider how the employee incentives can be matched with the company’s goals for favorable payment terms.
Explain Ownership Rights
It’s common for ownership concerns to create misunderstandings between parties if these aren’t explained in the agreement. It must be stated that the employee doesn’t acquire ownership rights from the transaction. Nail down exactly what rights aren’t going to be provided, such as shareholder rights.
Consider Termination
It could happen that the employee leaves the company, so the agreement should specify what will happen to vested and unvested units. For example, you might want to mention that vested units will be payable or unvested ones will be forfeited. Check that these provisions are fair and reasonable.
Include Tax Treatments
To prevent confusion over tax obligations, the agreement should include a clause that states payments are subject to applicable taxes and the participant (or employee) has to take on all tax obligations.
Check for Vague Language
When reviewing the phantom stock agreement, you should check it for any ambiguous phrases that can result in misunderstandings or disputes between parties. Everything should be clear and detailed so both parties understand the agreement prior to signing it.
How Does a Lawyer Assist You with Phantom Stock Agreement Review?
A lawyer has the legal background and experience in phantom stock agreements to provide an in-depth review of your contract. Here are some ways in which a lawyer can help you during the review process.
- They’ll review all key sections of the agreement, such as payouts and trigger events, to protect your interests.
- They’ll make changes to the agreement, such as replacing any vague wording with clear and specific terms without compromising legal compliance.
- They’ll confirm that the agreement meets all the applicable laws and regulations.
- They’ll explain all terms that could be confusing so you know exactly what you’re signing.
- They’ll evaluate the company valuation provisions to ensure that they’re fair.
- They’ll make the agreement consistent with other agreements, such as employment contracts and shareholder agreements.
- They’ll do more than provide a review, such as negotiate with the other party for mutually-favorable terms.
- They’ll assess future events, such as if the company is acquired, and how this will affect the plan. They can include provisions in the agreement to protect your interests.
Where to Find a Lawyer for Phantom Stock Agreement Review
If you need a lawyer to review your phantom stock agreement, you don’t have to find the process of finding and hiring a lawyer challenging or stressful. Online legal platforms make it convenient to do from the comfort of your home.
ContractsCounsel is one of the largest online legal marketplaces that gives you access to a curated network of vetted lawyers.
You can request that a qualified lawyer on the platform reviews your phantom stock agreement. To do so, here are the easy steps to follow:
- Go to the ContractsCounsel marketplace.
- Post your project for free. Add a few project details to help you find the most suitable lawyer, such as if you’re concerned about specific clauses in the agreement.
- Wait to receive lawyer bids. You’ll receive multiple bids from lawyers directly on the platform.
- Review the lawyers’ profiles. You can go through the lawyer data on the platform, such as the lawyer’s location, expertise, years of experience, and client ratings for previous projects completed on the platform.
- Connect with a lawyer you think is best suited to your requirements and hire them to review your phantom stock agreement for a flat fee.
