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What I want to introduce to you is just one of the many vehicles that exists to

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incentivize employees. And it's called Phantom Equity.

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Welcome to the game where we talk about how to get more customers, how to make more

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customers, how to keep them longer, and the many failures and lessons we have learned

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along the way. I hope you enjoy and subscribe. So I was having a conversation with a newer

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business owner and he was talking about how he had this person who was good at marketing

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and he wanted to give them a percentage of his business, but not the whole business

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in order to do his marketing. And after talking about it a little bit more,

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it became clear that it really should just have a performance relationship and not give up equity.

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But one of the key things is that there are positions that are more difficult to measure

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within a business that it does make sense over time to, you know, give some sort of equity

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to an employee because I have realized over time is that in order to grow my slice of the pie,

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it's better to get a bigger pie and have more people get wealthy. And so having other people use

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my business as a vehicle for their wealth has ultimately allowed me to gain leverage on how I can

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increase my own wealth. And one of my rules of life is the more money I make other people,

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the more money I make. And that is not just limited to your customers. It's also applies to your

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employees. And that's been something that it took me much longer than I expected, much longer than

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I had hoped to learn. So hopefully I can transfer that lesson to you faster. Sam Walton even talked

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about this in his book, Made in America, how he said one of the biggest things that influenced

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Walmart's growth is when they created their employee stock option program. And by doing that,

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he said there was such a tremendous amount of buy-in that the company just continued to

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roar and grow and he said he wish he had done it sooner. And so taking the advice from that man

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and somebody who's made much less money than Sam Walton, myself, what I want to introduce to you is

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just one of the many vehicles that exist to incentivize employees. And it's called phantom equity.

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This is something that I have used in every company that I own. I believe it or not. I've used

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phantom equity to incentivize high-level employees in just about every company. And it happened

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because I actually had someone use it with me as an affiliate. So I was an affiliate of a big

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software company and the CEO flew out and was like, hey, how can I make this really worth it for you

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to push this? And I was like, listen man, I enjoy the affiliate commissions, but for me to really

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make this like a focus, I would need some sort of equity on the upside. He said, well, what if I

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instead of giving you equity, I can give you phantom equity? And I was like, what's that? And so he

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explained it and I want to explain to the extent that I understand it as an entrepreneur, explain it

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to you as we've used it. So I'm going to break this down to the employee in the owner.

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All right. Now in this case, the example I just said, I wasn't an employee, but I still have

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treatment. I'll use the employee as the example here. All right. So there's a couple different

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variables that you can think through about phantom equity. So phantom equity is simply put

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equity that is not vested, but has events that can trigger its vesting. Vesting means whether

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it's, it's, it's happened or not. Like does that equity exist? Is it yours or not? Has it vested?

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All right. So the first thing is, a family equity is typically triggered upon a sale or a

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change in liquidity. Now there's variables. All of this stuff is negotiable. All of these things

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have variables. So I could say, for example, phantom equity vests or you are able to participate in

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a transaction of the company if ownership changes, if majority ownership changes. So that would be

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a clause that I could say, if I sell a majority of the company, then you can liquidate your shelves

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along with me. Now, the reason that you might not include something like that is because a buyer

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might not want the key employees to leave with the liquidation event. So that's something that would

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protect the owner. Now, if you wanted to say, hey, I want to do it so that you guys can participate,

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then you could also put like you can sell up to this amount or you can sell proportional amount.

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So there's lots of different caveats here, but big picture. Most people have phantom equity,

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so that if there's a transaction of some sort, the employees can also participate in it and build

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their own wealth alongside the objective of phantom equities to get owner like thinking and owner

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like engagement owner like behavior among people who are not majority owners of the business.

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In a lot of times, this makes a ton of sense. Like, I used to be so stingy with equity early on,

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well, in the very beginning, I was really, really loose with equity and then I kind of like swung

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back the other direction didn't want to give anyone equity. And I feel like now I've kind of

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fallen in the middle path of, I don't need to give huge chunks away to people. I need to find

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people who are key key players and give them phantom equity that is proportional to the effort

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in the contribution that they have. Right? I used to give away disproportionate chunks and I ended

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up paying for it and then later I ended up trying to find ways to incentivize hot incentivize

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and attract high level employees. And the best people want a stake because winners win and they

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know they're going to win. So they want to have be able to participate in the upside. So

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number one, that is where sale is triggered. The second is that it's beneficial from a wealth

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standpoint because the employee can increase the value of their wealth, their stake, the phantom

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equity by increasing the value of the business. Right? And the beauty of that is that it's entirely

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tax rate. Now the owner and employer completely aligned on this one together. Now from a tax

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standpoint, the reason you've phantom equity instead of normal equity is that if you give normal

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equity, the employee also gets the downside of equity. All right? So this is good for the employee.

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Right? It's good because the employee doesn't have to buy the equity because normally if you

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actually have an equity transfer, a true transfer, then what happens they actually have to pay tax on

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it because they're getting something. Right? I can't just, Zuckerberg can't just give, you know,

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all of his shares to Facebook to somebody, they have to pay taxes on it. Right? And so you can't,

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that is a taxable event when you transfer equity. So you make it phantom equity because it doesn't

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technically invest unless a trigger occurs. And so what that does is means that they don't have to

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get taxed on it, right? Which is beneficial, you know, for the employee.

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Right? Now the downside of this though is that typically it will get triggered as regular income

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during the sale. Now there's ways of writing this. I'm not going to get into the complexities

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around this, but this is kind of around the vesting schedule, which is when are they going to get this?

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So for example, you could say I want to give you 5% of this company and I want to give it to you

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over five years, which means you get 1% a year for the next five years. And you could say hey,

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I want to create a cliff, which means that after the first year, the entire first percent vests,

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then after that every quarter, another 0.25% vests after that. So that means that at, you know,

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month nine, they're still zero vesting. And then at month, you know, 13, they'll have 1%

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that will have vested in its entirety. And then after that, it's piecemeal, right? What happens

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if the employee leaves? Now one of the benefits to this and this protects the owner is what if you say,

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you know, someone comes in, they're a hot shot, they're, you know, smooth talking and they're like,

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yeah, man, I want a phantom equity, whatever. And they, and you're like, sure, I'm going to give you

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5% over the next five years, right? And let's say they, they leave within, you know, X period of time.

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Now, A, upon the termination of the employee, you can have them not get those. And you can also

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write that into the original game, which means that if you leave, you lose your phantom equity,

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right? Which also gets people to stick with it over the longer term, which is why companies employ

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this structure. It's to incentivize people to stay and continue to grow the business, right?

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This protects the owner, the tax thing, it protects the employee, the other piece that protects the

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employees that with phantom equity, they're not liable, right? So if something happens to the

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business, the employees and personally liable, which is why this is a nice attractive thing for many

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people. Now, this one is, is something that's interesting I want to talk about, which is profit,

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right? Because a lot of times people can flate equity with profit. You can be an equity owner and

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not participate in profit distributions. You can also participate in profit distributions and

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not be an equity owner. So these things are not connected. Oftentimes, we think of them together

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because we as owners have both, but it doesn't mean that our employees need that necessarily. And

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I'm not saying you shouldn't do that. I'm just saying it is yet another variable that is considered

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in the negotiation. And so, one of thinking through phantom equity, most times is going to depend on

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the value of the business. But what I learned from the, you know, the mentors that I have spoken with,

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typically when you're having a leadership type position, who's a senior leadership. So

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somebody who's like on the executive track, they might get between half a percent to 2% depending

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again on the value of the business, their seniority, their experience, et cetera. And if you have a

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true executive that's a, a huge value ad that is leading, you know, almost half the company,

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et cetera, then that is where, you know, sometimes 3%, 4%, 5% can, can come into play. And so,

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this is phantom equity. There are lots of different types of, you know, you can do bonus programs,

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you can do eSOPs, which is the story in police agriculture programs. There's lots of different

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things you can do in a business, but this is one that I have used and has been very, very helpful

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for me. I've had people leave who had had equity and we've been able to be on good terms,

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everything's been fine. They were protected from a tax standpoint. I tend to keep profit sharing,

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not to say that it's bad or a good thing. It's just my preference. I love the fact that my

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employees can grow there well alongside me because they hear the same videos that you guys watch.

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And then finally, it's nice because they think in terms of a sale, so they're thinking in terms

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of enterprise value. So, the moral line that can make my, make my team and their life outcomes

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with my personal life outcomes, then the moral line will be. And ultimately, the faster we'll move

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in that direction because we're not, you know, pushing, focus, and effort in opposite directions,

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we're all 100% aligned. And so, phantom equity is one of the best vehicles for that. I hope you

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found value in this video. You can click subscribe. And if you're thinking about doing something like

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this, I'd recommend it. I think that it's better to increase the size of the pie, give a handful

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of slices out to people who've helped you along the way. And I think that for me, as I've shifted,

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I really just want everyone to be wealthy. Heck, there's a lot of people who are broke and the reason

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I made this channel is so that you're not one of them. One of the best things that I can think of

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is helping the people who've helped me build this. And so, building my employees wealth is something

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that is mine. It's something top of mind for me and trying to find new ways and creative ways

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to build wealth about necessarily sacrificing, you know, weak build and risk to get here. So,

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hope you found the value. Well, click subscribe and I'll see you guys next week. Bye!