Phantom equity

Definition

A contract paying a key employee as if they owned a share of the business.

Why It Matters

A buyer financed by an SBA loan usually cannot give away real equity: the lender underwrote a specific ownership structure and a personal guarantee attaches to it. Phantom equity keeps the manager who holds the customer relationships without a cap table, a shareholder agreement, or a minority owner you would have to buy out later. Write the trigger and the valuation formula into it at the start, because both are impossible to agree once the number is large.

In numbers: Granting 5% phantom equity in a business bought for $1.5M costs nothing at signing and roughly $75,000 if it is sold at the same price, paid out of the proceeds rather than out of cash flow.