https://www.youtube.com/watch?v=PxpPynt1mis

1 00:00:00.000 --\> 00:01:00.000 what i want to introduce to you is just
one of the many vehicles that exist to incentivize employees and it's
called phantom equity so i was having a conversation with a newer
business owner and he was talking about how he had this person who was
good at marketing and he wanted to give them a percentage of his
business but not the whole business in order to do his marketing and
after talking about it a little bit more it became clear that it really
should just have a performance relationship and not give up equity but
one of the key things is that there are positions that are more
difficult to measure within a business that it does make sense over time
to you know give some sort of equity to an employee because i have
realized over time is that in order to grow my slice of the pie it's
better to get a bigger pie and have more people get wealthy and so
having other people use my business as a vehicle for their wealth has
ultimately allowed me to gain leverage on how i can increase my own
wealth and one of my rules of life is the more money i make other people
the more money i make and that is not just limited to your customers
it's also applies to your employees and that's been something that it
took me much longer than i expected much longer than i had hoped to

2 00:01:00.000 --\> 00:02:00.000 learn so hopefully i can transfer that
lesson to you faster sam walton even talked about this in his book made
in america how he said one of the biggest things that influenced
walmart's growth is when they created their employee stock option
program and by doing that he said there was such a tremendous amount of
buy-in that the company just continued to roar and grow and he said he
wished he had done it sooner and so taking the advice from that man and
somebody who's made much less money than sam walton myself what i want
to introduce to you is just one of the many vehicles that exist to
incentivize employees and it's called phantom equity this is something
that i have used in every company that i own uh believe it or not i've
used phantom equity to incentivize high level employees in just about
every company and it happened because i actually had someone use it with
me as an affiliate so i was an affiliate of a big software company and
the ceo flew out and was like hey how can i make this really worth it
for you to like push this and i was like listen man like i i enjoy the
you know affiliate commissions uh but i for me to really make this like
a focus i would need some sort of equity on the upside he said well what
if i instead of

3 00:02:00.000 --\> 00:03:00.000 giving you equity um i can give you
phantom equity and i was like what's that and so he explained it and i
want to explain you know to the extent that i understand it as an
entrepreneur explain it to you as we've used it so i'm going to break
this down to the employee and the owner all right now in this case the
example i just said i wasn't an employee but i i still have treatment
i'll use the employee as the example here all right so there's a couple
different variables that you can think through about phantom equity so
fandom equity is simply put equity that is not vested but has events
that can trigger its vesting vesting means whether it's it's happened or
not like does that equity exist it is it yours or not has it vested all
right so the first thing is famine equity is typically triggered upon a
sale or a change in liquidity now there's variables all of this stuff is
negotiable all of these things have variables so i could say for example
the phantom equity vests or you are able to participate in a transaction
of the company if ownership changes if majority ownership changes so
that would be a clause that i could say if i sell a majority of the

4 00:03:00.000 --\> 00:04:00.000 company then you can liquidate your
shells along with me now the reason that you might not include something
like that is because a buyer might not want the key employees to leave
with the liquidation event so that's something that would protect the
owner now if you wanted to say hey i want to do it so that you guys can
participate then you could also put like you can sell up to this amount
or you can sell a proportional amount so there's lots of different
caveats here but big picture most people have the phantom equity so that
if there is a transaction of some sort the employees can also
participate in it and build their own wealth alongside the objective of
phantom equity is to get owner-like thinking and owner-like engagement
owner-like behavior among people who are not majority owners of the
business and a lot of times this makes a ton of sense like i used to be
so stingy with equity early on well in the very beginning i was really
really loose with equity and then i kind of like swung back the other
direction didn't want to give anyone equity and i feel like now i've
kind of fallen in the middle path of i don't need to give huge chunks
away to people i need to find people who are key key players and give
them phantom equity that is proportional the effort and the contribution
that they have right i used to give away

5 00:04:00.000 --\> 00:05:00.000 disproportionate chunks and i ended up
paying for it and then later i ended up trying to find ways to
incentivize hot incentivize and attract high level employees and the
best people want a stake because winners win and they want they know
they're going to win so they want to have be able to participate in the
upside so number one uh that is where sale is triggered the second is
that it's beneficial from a wealth standpoint because the employee can
increase the value of their wealth their stake their phantom equity by
increasing the value of the business right and the beauty of that is
that it's entirely tax free now the owner and employer completely
aligned on this one together now from a tax standpoint the reason you do
fandom equity instead of normal equity is that if you give normal equity
the employee also gets the downside of equity all right so this is good
for the employee right it's good because the employee doesn't have to
buy the equity because normally if you actually have an equity transfer
a true transfer then what happens they actually have to pay tax on it
because they're getting something right i can't just zuckerberg can't
just give you know all of your shares to facebook to somebody they have
to pay taxes on it right and so you can't that is a taxable event when
you transfer equity so you make it phantom equity because it doesn't
technically invest unless a trigger occurs and so what that

6 00:05:00.000 --\> 00:06:00.000 does is it means that they don't have
to get taxed on it right which is beneficial you know for the employee
right now the downside of this though is that typically it will get
triggered as regular income during the sale now there's ways of writing
this i'm not going to get into the complexities around this but this is
kind of around the vesting schedule which is when are they going to get
this so for example you could say i want to give you five percent of
this company and i want to give it to you over five years which means
you get one percent a year for the next five years and you could say hey
i want to create a cliff which means that after the first year the
entire first percent vest then after that every quarter another point
two five percent fest after that so that means that at you know month
nine they're still zero investing and then at month you know 13 they'll
have one percent that will have vested in its entirety and then after
that it's it's piecemeal right what happens if the employee leaves now
one of the benefits to this and this protects the owner is what if you
say you know someone comes in they're a hot shot they're you know smooth
talking and they're like yeah man i want to phantom equity whatever and
they and you're like sure i'm going to give you five percent over the
next five years right and let's say they

7 00:06:00.000 --\> 00:07:00.000 they leave within you know x period of
time now a upon the termination of the employee you can have them not
get those um and you can also write that into the original green which
means that if you leave you lose your phantom equity right which also
gets people to stick with it over the longer term which is why companies
employ the structure it's to incentivize people to stay and continue to
grow the business right this protects the uh owner the tax thing it
protects the employee the other piece that protects the employees that
with phantom equity they're not liable right so if something happens in
the business the employees are personally liable which is why this is a
nice attractive thing for many people now this one is is something
that's interesting i want to talk about which is profit right because a
lot of times people conflate equity with profit you can be an equity
owner and not participate in profit distributions you can also
participate in profit distributions and not be an equity owner so these
things are not connected oftentimes we think of them together because we
as owners have both but it doesn't mean that our employees need that
necessarily and i'm not saying you shouldn't do that i'm just saying it
is yet another variable that is

8 00:07:00.000 --\> 00:08:00.000 considered in the negotiation and so
when i'm thinking through phantom equity most times it's going to depend
on the value of the business but what i learned from the you know the
mentors that i have spoken with typically when you're having a
leadership type position who's a senior leadership so somebody who's
like on the executive track they might get between half a percent to two
percent depending again on the value of the business their seniority
their experience etc and if you have a true executive that's a huge
value add that is leading you know almost half the company etc then that
is where you know sometimes three percent four percent five percent um
can can come into play and so this is phantom equity there are lots of
different types of you know you can do bonus programs you can do esops
which is a story employee stock ownership programs there's lots of
different things you can do in a business but this is one that i have
used and has been very very helpful for me i've had people leave who had
had equity and we've been able to be on good terms everything's been
fine they were protected from a tax standpoint i tend to

9 00:08:00.000 --\> 00:09:00.000 keep profit sharing not to say that
it's bad or a good thing it's just my preference i love the fact that my
employees can grow their well alongside me because they hear the same
videos that you guys watch and then finally it's nice because they think
in terms of a sale so they're thinking in terms of enterprise value so
the more aligned i commit mike make my team and their life outcomes with
my personal life outcomes then the more aligned will be and ultimately
the faster we'll move in that direction because we're not you know
pushing focus and effort in opposite directions we're all 100 aligned
and so phantom equity is one of the best vehicles for that i hope you
found value in this video you can click subscribe and if you're thinking
about doing something like this um i'd recommend it i think that it's
better to increase the size of the pie give a handful of slices out to
people um who who've helped you along the way and i think that for me as
i've shifted i really just want everyone to be wealthy heck there's a
lot of people who are broke and the reason i made this channel is so
that you're not one of them one of the best things that i can think of
is helping the people who've helped me build this and so building my
employees wealth is something that is my is something top of

10 00:09:00.000 --\> 00:10:00.000 mind for me and trying to find new
ways and creative ways to build wealth without necessarily sacrificing
you know we've built and risked to get here so hope you found it
valuable click subscribe and i'll see you guys next week bye
