Phantom shares, also known as phantom stock or shadow shares, let you link employee rewards to your company’s value without transferring actual ownership.
They’re a flexible, cash-based incentive that mirrors real equity, offering many of the motivational benefits of share ownership, minus the legal complexity or dilution.
If you’re exploring ways to reward performance, retain key people, or align global teams, this guide explains how phantom shares work, why they’re popular, and what to consider before introducing a plan.
Phantom shares are a type of cash bonus plan that tracks the value of your company’s real shares.
Instead of issuing stock, you grant employees or partners a set number of phantom units. Each unit reflects the value of one real share, and its worth rises or falls in line with your company’s share price.
When a predefined event occurs, such as an exit, sale, or valuation milestone, recipients receive a cash payment equal to the increase in value.
No shares are issued. No ownership is transferred. Phantom shares simply simulate the financial upside of holding equity.
There are two common structures:
Appreciation-only phantom stock. The participant receives the gain in value over time.
Full-value phantom stock. The participant receives the full share value (minus any exercise price).
For example, if an employee is granted 1,000 phantom shares at a base price of £0.50, and the company’s share value rises to £2.00, they’ll receive a cash bonus based on the £1.50 increase per share.
These plans often include vesting conditions or performance milestones, ensuring rewards are earned, not automatic.
In short, phantom shares give you a way to share in success without changing your ownership structure.
Phantom share plans are attractive to founders because they reward performance without diluting equity or changing control.
They’re simple to set up, easy to manage, and flexible enough to use across different roles and countries.
Here’s why many growing companies introduce them:
Retain and motivate talent. Phantom shares give employees a tangible link to the company’s success, encouraging long-term thinking and performance.
Preserve ownership. Since no shares are issued, your cap table remains clean and undiluted, which is a major advantage if you’re preparing for funding or a future sale.
Protect control. Founders and existing shareholders retain full voting rights and strategic authority.
Flexible eligibility. Unlike EMI or CSOP share schemes, phantom shares can be awarded to any contributor, including contractors, consultants, and overseas team members.
Cash-efficient rewards. Payouts happen only when milestones are hit or value is realised (for example, at exit), rather than immediately.
Phantom shares align incentives with performance, without the administrative load of issuing real equity.
Think of a phantom share plan as a long-term bonus agreement tied to company value.
You start by defining:
Who’s eligible? Employees, directors, or external partners.
How many units to grant: similar to share allocations.
The valuation method: How the share price (and any future growth) will be calculated.
Vesting conditions: these may be time served, performance milestones, or company valuation targets.
The trigger event: The moment when participants receive their cash payment, perhaps at an exit, IPO, or liquidity event.
Because the payout depends on real business results, phantom shares create a powerful performance link.
Recipients know their financial reward is directly tied to the company’s success.
Many founders link phantom shares to clear business goals, such as profitability, revenue growth, or successful fundraising rounds, to make performance tracking simple and transparent.
Phantom shares are treated as cash bonuses for tax purposes. That means:
Recipients pay Income Tax (and National Insurance, if applicable) on the payout at their standard rate.
Employers must deduct PAYE at the time of payment.
No tax is due when phantom shares are granted, as there’s no transfer of ownership or immediate cash benefit.
While phantom shares don’t benefit from the tax advantages of schemes like EMI or CSOP, their simplicity and flexibility often outweigh the difference, especially for companies that don’t yet qualify for HMRC-approved schemes or have international teams.
Phantom shares are taxed as income, but they remain one of the simplest ways to reward success without complex share arrangements.
Phantom shares are particularly useful for:
Early-stage or international teams who want to offer incentives before formal share valuations are available.
Companies not eligible for EMI or CSOP (for example, those with overseas employees or non-UK subsidiaries).
Businesses planning an exit in the medium term where a cash payout tied to sale value is simple to administer.
Organisations that want flexibility in adjusting terms or including non-employees without shareholder agreements.
They’re less suited for companies looking to build deep emotional ownership over the long term, where true share schemes may be more effective.
But for aligning performance, retaining key people, and preserving control, phantom shares strike a practical balance.
While phantom shares don’t grant real equity, they still play an important role in building trust and alignment.
They show that leadership is willing to share success and recognise contribution, even before an exit. This sense of fairness can have a powerful motivational effect.
We surveyed our customers, and 95% of companies offering ownership-based incentives reported improved motivation and retention.
Phantom shares can deliver a similar sense of shared purpose, particularly when combined with open communication about performance and value creation.
Phantom shares offer a clean and flexible way to reward performance without issuing stock or diluting ownership.
They’re ideal for businesses that want to:
Tie incentives to company growth.
Reward international or non-employee contributors.
Delay issuing equity until later funding stages.
They don’t replace share schemes, but they do provide a simpler, more cash-focused path to alignment.
For many founders, phantom shares are the perfect stepping stone: a way to build a performance-driven culture now, while keeping options open for real shares later.
Have questions about equity? Book a free consultation with Vestd.