# Phantom equity

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

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

In numbers: Granting 5% phantom equity in a business bought for $4M costs nothing at signing and roughly $200,000 if it is sold at the same price, paid out of the proceeds rather than out of cash flow.

Source: https://searchspheresource.com/glossary/phantom-equity
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