Be Mindful Of Phantom Equity

Phantom equity is a form of employee compensation that confers benefits linked to the value of a company's shares without actually bestowing any ownership of shares on the employee. It is called "phantom" equity because it mimics the economic benefits of actual stock ownership.

About 5% of our deals include phantom equity in the post-closing incentive equity pool available for management, according to the Goodwin's Private Equity Deal Database.

As a recent court decision shows, it is important for deal makers to ensure they are clear about how they define terms such as phantom equity in their merger agreements, because misunderstandings can cause costly disagreements and can even scuttle deals.