In the previous article, we explored how to explain Phantom Shares to employees who may become their beneficiaries. We saw that they can be a very powerful tool, but it has to be explained properly. How many should you actually grant? How much should you reserve to keep investors comfortable while still effectively motivating your team?
First, it’s important to understand that Phantom Shares are far from “free” for the company. In a sale scenario, buyers will take them into account when determining how much they are willing to pay per share, effectively treating them as real equity. If too many are granted, investor returns are diluted, which is why a cap is always agreed upon with investors at each funding round.
There is a natural temptation to keep this pool as small as possible to minimise the impact on both founders and investors. However, it can make a lot of sense to grant Phantom Shares to employees who are likely to more than offset that dilution through increased motivation and performance. After all, most investors would gladly accept a 10% dilution if it resulted in a 30% increase in company growth.
As with many things, it’s helpful to rely on market benchmarks. Typically, startups allocate between 5% and 15%, depending on their stage. In Spain, this percentage tends to decrease over time, while in the US it often increases. These differences reflect distinct market dynamics. For example, US startups are more frequently built with an IPO in mind, which shifts incentives significantly.
At this point, we understand how to explain Phantom Shares and roughly how much to allocate. A range between 5% and 15% is generally a good balance between employee motivation and investor dilution. In the next article, we’ll address a particularly sensitive question: should Phantom Shares be granted to everyone, or only to specific profiles within the team? Keep reading!
