Example of an LOI with Phantom Equity?

August 29, 2024

by a searcher from Harvard University in Nashville, TN, USA

Would anyone have any examples or template clauses that I might learn from on paying out equity rollover for a seller using phantom equity?

Also, if you happen to have any experience with using phantom equity, would you share your learnings?

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Reply by a professional
from University of Michigan in Detroit, MI, USA

Thanks ^redacted‌ and ^redacted‌. ^redacted‌, What are you offering the seller? Retained equity (you're buying less than 100% of the company), or phantom equity, which is a type of compensation tied to the equity of a company. As you likely already know, phantom equity is not actual equity, it's a contractual promise to compensate someone as if they owned equity. Just so it is on your radar, a phantom stock arrangement may trigger adverse tax consequences under IRC Section 409A if not structured properly. If helpful, I'm happy to discuss. Feel free to DM me here or reach out directly at redacted and we can discuss.

Reply by a searcher
from Cornell University in Boston, MA, USA

Many lawyers call "Phantom Equity" a "Profits Interest." Others call it a "Carry." All basically the same. It is a highly documented area. The key theme is that the equity is earned over an agreed upon investment return hurdle. No matter what you choose in the realm of Phantom Equity, Carry, Profits interest, Earn-out, Seller Note, IOU on a Paper Napkin, etc., you should expect to have continuing, detailed conversations with the seller after closing about the instrument's calculation and value.

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