Why You Need To Ask For Phantom Equity

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Estimated read time: 4 minutes 22 seconds

1. What is Phantom Equity and Why You Should Ask For It

2. Winter is Coming

Good morning and happy Monday - let's get smarter

What is Phantom Equity and Why You Should Ask For It

Everyone knows about equity, but more and more people need to understand and ask for phantom equity

Phantom equity = a transaction bonus more or less for an employee

Phantom equity is a concept that a lot of private businesses and startups use to incentivize c-suite employees to join their company when they can’t compensate them fair market value in cash

They could also just not want to do all cash, because giving someone equity in a company aligns them with the company for the long-term, where a salary does not

The benefit for a founder and the key here with “phantom” is that the employee doesn’t have an actual equity stake

Meaning if the company paid a dividend/made a distribution, you wouldn’t technically be an owner so you wouldn’t receive this

Instead - phantom equity states that if/when the company sells, you receive a % of the proceeds

So it’s not real equity until there is a sale (liquidity event)

The benefit to the company/founder is that they don’t have the risk of giving an employee equity, and then they don’t work out or disappear but still have ownership and a say in the company

If the person who receives the phantom equity is no longer with the company when the transaction takes place, they would get 0%

This is why it’s phantom

It's not actual equity ownership

If you stick around and there’s a sale, you receive a payout, if you’re not, it’s as if it never existed

This is not possible for public companies, as their equity trades on a public stock exchange

This is a mechanism for private companies to incentivize their employees

There are a lot of opportunities based on your position or value you provide to get a phantom equity %, even 1%

Additionally, quite a few people I know have <1% of a few different companies just being on the board or serving as an advisor

Power of Phantom Equity

You have yearly cash based compensation of $120k and instead of a 10% raise, you get 1% phantom equity as a senior executive

Let’s say the company sells for $10m 3 years later

You forfeited approximately $40k over the 3 years taxed at 35% = $26k after taxes

You receive 1% of $10m = $100k taxed at capital gains rate 20% = $80k after taxes

That’s the power of phantom equity and it’s more appealing to the company and founder because it’s not an actual equity % unless a liquidity event (sale) happens

Winter is Coming

This past week, the chairman of the Federal Reserve, Jerome Powell, said they don’t anticipate additional interest rate hikes (more than the ones already expected in the future) and anticipate slowing the rate of hikes in 2023

The market reacted bullish to that and the Nasdaq sores 4% in a day because if Powell said they need to raise interest rates, then

1. Inflation isn’t slowing

2. Higher interest rates slow lending, spending, and GDP growth

Both = bad for the economy

However - a point I continue to try and beat into the ground

The fed’s policies ^ impact the SHORT-end (2 yr yields) of the yield curve

The long-end of the yield curve is impacted by growth (GDP)

So one of the best signals to pay attention to for the economy as a whole is the 10 yr and 30 yr yield curve, the long-end as it will start to smell slowing GDP (recession) first

As it starts and continues to move down, it is signaling a more rapid slow down in US GDP = very bearish

Using one of our proprietary signals that looks at volatility, the yield curve which was signaling bullish and momentum trending upwards has changed to yellow/neutral

So while it’s not red yet, that transition is significant sniffing out a pending deeper recession in 2023

So while the fed says they expect to slow rate hikes beginning in 2023 (just words), the math didn’t pay attention to the US Fomo

Some other bearish points

US Personal Savings

Consumer Credit Card Debt

US Consumer credit card debt continues to soar with high inflation, making consumer's dollars worth less and debt even more painful

We still like core positions such as USD, GLD, XLV, PINK, LQD

Bonds trading inversely to their yields, so if bond yields are starting to trend down, bond prices will start to trend up

We are more and more bullish on bonds headed into a deeper slow down in Q1 of 2023

Dev

DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.