Phantom Shares are a modern system of variable remuneration for company directors that is used mainly in the so-called Start Up companies (newly created companies whose business usually has a technological base).

Specifically, the Phantom Shares consist of an incentive plan for employees, especially managers, which confers on them benefits similar to those corresponding to the holding of real shares without the beneficiaries owning shares in the company. In other words, these are imaginary shares that refer to the company’s capital stock, but do not form part of it. For example, 100 Phantom Shares equivalent to 5% of the company’s capital stock are granted to a certain executive.

It is an atypical legal figure in the sense that Phantom Shares are not regulated in our legal system, which gives the parties (the company and the directors) full freedom to regulate them. Thus, in practice we find Phantom Shares with different contents depending on the aspects that each company wants to cover.

From the point of view of the company that grants the Phantom Shares, they have the advantage over Stock Options that their beneficiaries are not shareholders of the company and, therefore, do not have political rights (votes at shareholders’ meetings).

Phantom Shares are a system of remuneration for executives whose vesting normally occurs after a certain period of time has elapsed since they were granted; this is intended to ensure the permanence of the executive in the company for a certain period of time.

Vesting Period / Cliff Period

Phantom Shares are normally allocated to the executive, usually progressively over a certain period of time, and starting from a minimum length of service in the company (Cliff Period).

For example, the agreed number of Phantom Shares is awarded over a period of 4 years at a rate of 25% per year (Vesting Period) and as of the second year of tenure with the company (Cliff Period).

Liquidity Events 

The Phantom Shares constitute a compensation system that normally materializes (“monetizes”) upon the occurrence of any of the following events:

  • Upon the sale of a substantial portion of the shares representing the capital stock of the company, the holder of the Phantom Shares will be entitled to sell the Phantom Shares in the same proportion as the shares sold (for example, if 50% of the capital stock of the company is sold, the holder of the Phantom Shares will sell 50% of its Phantom Shares).
  • The merger of the company with another company, unless the majority shareholders of the entity resulting from the merger are the same as those who were the majority shareholders of the company.
  • The payment of dividends by the company.

The right to payment derived from liquidity events is normally conditioned to the company having, at that moment, a minimum value stipulated in the contract that regulates the Phantom Shares (Strike Price). The positive difference between this minimum value and the current value is the value that the executive would have helped to create and that would justify the payment of the incentive.

It is also customary to place a quantitative limit on the amount to be received by the executive as a result of the Phantom Shares. For example, the executive may not receive an amount greater than €100,000, even if the result of applying the incentive formula gives a higher amount.


It is customary to establish a term (such as five years) after the expiration of which the Phantom Shares are automatically cancelled, even if no liquidity event has occurred during that period.


The Phantom Shares are extinguished early if the relationship between the Executive and the Company is terminated due to a breach by the latter (“bad leaver”) and no amount is received for the Phantom Shares.

On the other hand, if the termination of the relationship between the executive and the Company is not due to a breach by the executive (“good leaver”), the latter will retain the Phantom Shares held at that time.

 Early termination of the Phantom Shares

The contracts governing the Phantom Shares normally provide for the right of both parties to early termination of the Phantom Shares, establishing the grounds for such early termination and the formula for the calculation of the price to be paid by the company to the executive officer holding the Phantom Shares being terminated.


These are the main features that define the so-called Phantom Shares which, as we have said, constitute a useful means for the remuneration of managers of newly created companies or also known as Start Ups.