Offering equity when looking to hire a senior leader/CEO

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June 24, 2025

by a professional from University of Virginia-Darden - Darden School of Business in Charlottesville, VA, USA

I speak with owners of small and mid-size businesses often who are looking to hire a senior leader, like a CEO. We are an exec search firm that places high-performing military veterans into leadership roles at SMBs. And they want to offer equity. Here's what I say: Don't. Two reasons why, and then what to do instead: 1. Odds are, you don't know this person as well as you think. That's not to encourage distrust, but just being real. When entering into an equity agreement, you are entering into a relationship that is easy to enter and much harder to exit. So, give out equity cautiously. 2. By granting equity upfront, you may be limiting options down the road. Let's say you hire someone and they do really well. After a few years, they might be looking ready to leave, but you don't want them to. If you have already given them equity, your options are: 1. They leave with that equity 2. You offer them more If you DID NOT offer equity at the start, you now have that option to entice them to stay. So you reserved that option for only your best performers. So, what to do instead? Offer a transparent bonus package that is tied to performance and, for really key hires, offer phantom stock at the start. Much of the same upside without the complications.
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Reply by a searcher
from University of Maryland at College Park in Annapolis, MD, USA
In my experience, it substantially depends on the stage of development of the company, the qualifications of the executive, and the non-equity components of the compensation package. For startups and early stage companies that cannot afford competitive cash comp and incentives, it will be difficult to recruit top talent without not only equity but in some cases substantial equity. For more mature companies that can afford competitive comp packages, the equity or equity-like incentives will much smaller and can be structured in various ways other than a simple upfront equity grant.
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Reply by a searcher
from University of Colorado at Boulder in Norfolk, VA, USA
Can you define "phantom stock"? From a simple perspective, stock is simply the way to measure how much equity someone has in a company (# shares owned/#shares issue = % equity). I realize that there are lots of types of stock (common, preferred - classes that usually translate to voting rights) but I'm not familiar with phantom stock.
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