Phantom Shares

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The term ‘phantom shares’ refers to a form of company share that is not regulated as a typical company share by the Spanish government and instead treated as a form of pay bonus. The policy tool is similar to stock options in other nations.
What are the main aims and objectives?
The primary objectives of the phantom shares tool are to incentivize and retain key employees or professionals in a company, particularly in start-ups. These shares allow employees to participate in the company's profits and growth without actually owning shares, providing them with financial benefits without the need for high salary costs. This approach increases employees' loyalty, as they are more likely to remain with the company due to the potential economic advantages. Moreover, the phantom shares policy serves as a tool for attracting talent, offering an imaginative remuneration formula tied to the company's performance, which may be particularly appealing to potential employees. 
How does the program work?

Phantom shares work as a form of incentive for employees without modifying the company's capital structure or ownership. They are used particularly by start-ups that may lack financial resources to attract and retain key employees and professionals. These shares are granted through a private contract between the company and the employee, with the terms of the award, such as the number of phantom shares and when they can be collected, being determined in the contract. 

The value of these phantom shares is linked to the actual shares of the company, providing the same economic rights as real shares without the need for employees to purchase them or dilute the ownership of existing partners. They are subject to certain milestones, such as permanence in the company, and there's a distinction between good and bad leavers. 

In the event of an exit or liquidity event, holders of phantom shares are entitled to a bonus based on the price of common shares, which may be deducted from the purchase price if the company is sold. However, these shares do not provide actual ownership in the company and are considered more of a bonus rather than equity. 

Unlike traditional shares – which have historically faced very high levels of taxation in Spain – phantom shares are taxed and regulated as if they are bonuses paid on top of the employee’s wage.  

What is the overall cost?
There is no direct cost associated with regulating phantom shares in this way, however, there will be an overall effect on tax intake that has not been measured.  
How was it implemented?

Phantom shares, an incentive tool imported from the Anglo-Saxon world, were not introduced in Spain at a specific date. Unlike some financial mechanisms, they were not officially regulated or brought into existence through a particular piece of legislation. Instead, they gradually started being used by Spanish businesses as a means of remunerating and retaining key employees, especially in the startup sector where it might not be feasible to offer real shares. However, the exact timeline of their introduction in Spain remains unclear due to the lack of official regulation and specific legislative enactment related to phantom shares. 

Rather than being an invention of national policymakers, phantom shares are a tool that was developed by Spanish companies taking inspiration from the stock option plans used by American startups. However, due to legal and tax obstacles complicating the use of regular stock options in Spanish private limited companies, the concept of phantom shares emerged as a more feasible option. The policy is executed through a private contract, with phantom shares granted based on certain milestones and often backed by cash. 

What impact has been measured?
As phantom shares exist in the absence of national policy there has been little incentive so far to track the impact that they have had on Spanish startups. Moreover, there is currently no available academic research in this area.  
What lessons can be learned?

The use of phantom shares is often seen as a workaround to the restrictive stock option laws in Spain, rather than a solution. The New Startup Law, passed on January 1 2023, contains exemptions for shares, interests or stock options awarded to startup employees. Consequently, phantom shares may become less attractive and ultimately redundant within the Spanish system of shares.   

One of the main criticisms of phantom shares in Spain is their taxation. Since they are considered a form of bonus, they are subject to the same high tax rates as salaries. This could be discouraging for employees, as their remuneration from phantom shares may be significantly reduced after taxes. 

Another criticism is related to the lack of actual share ownership. Despite the economic benefits that phantom shares provide, the employees do not become actual shareholders, which means they miss out on the potential benefits of share ownership, such as voting rights. 

Moreover, while phantom shares offer flexibility due to the lack of specific regulation, this can also lead to uncertainty and inconsistency in their implementation. This lack of a unified legal framework can result in varying terms and conditions across different companies, potentially leading to unfair practices. 

CURATED BY

Tom Hancock

Research Associate
Global Entrepreneurship Network
United Kingdom