Calculating cash payments from startup valuation growth
Under a phantom share plan, an employee is granted a number of virtual units that track the value of one real share, without the company issuing any actual shares. When a defined payout event occurs, typically an acquisition or an agreed valuation date, the employee receives a cash payment equal to the increase in value of those units, often calculated as the difference between the company's value at grant and at payout.
Because no shares change hands, the cap table is never diluted and existing shareholders keep their full voting rights. Employees instead hold a contractual claim against the company, similar in spirit to a bonus scheme, but sized to track equity performance rather than a fixed bonus amount.
Managing German dry income risks with virtual equity
German tax law has historically made real employee stock options unattractive for startups, because Section 19a EStG and the general rules around benefit-in-kind taxation could tax employees on paper gains at exercise, before shares could be sold, creating dry income risk. Virtual plans avoided this because no taxable benefit arose until an actual cash payout was made, at which point the employee already had the cash to pay tax.
The 2021 and 2024 versions of the Zukunftsfinanzierungsgesetz (Future Financing Act) raised tax-free allowances and improved deferral rules for real employee shares, making real equity somewhat more attractive again, but VSOP remains the default structure for many German startups because it is simpler to administer and avoids valuation disputes at grant.
Phantom shares next to real stock options
| Feature | Phantom shares | Real stock options |
|---|---|---|
| Legal form | Contractual bonus right | Right to buy actual shares |
| Dilution | None | Yes, on exercise |
| Voting rights | Never | After exercise |
| Typical tax point | At cash payout | Varies by regime, often at exercise or sale |
| Administrative complexity | Lower | Higher, involves share issuance |
Contractual risks and unsecured creditor status
- Phantom share payouts depend entirely on the company having cash or a buyer at the payout event; there is no market to sell into as there might be with real shares.
- Employees have no shareholder protections and rank as unsecured creditors for the payout amount if the company becomes insolvent.
- Because there is no real equity, phantom plans do not usually qualify for capital gains tax treatment, and payouts are typically taxed as ordinary income.
- The definition of the payout formula (what counts as company value, and how the strike-equivalent baseline is set) needs careful drafting to avoid disputes.
Phantom share terms vary widely by company and country. Employees should read their specific plan document rather than assume standard equity terms apply.
What new holders ask about virtual units
- Do phantom shares dilute other shareholders?
- No. Because no shares are issued, phantom shares do not appear on the cap table and do not dilute existing shareholders, though the company does record a potential future liability.
- Can phantom shares convert into real shares?
- Not automatically. Some companies choose to convert virtual plans into real equity later, for example ahead of an IPO, but this requires a separate decision and is not guaranteed by the phantom plan itself.
- Is a phantom share plan the same as a bonus scheme?
- It is similar in that both pay cash, but a phantom plan is explicitly sized to track the value of the company's shares over time, rather than being a discretionary or fixed bonus.
General information for founders, not legal or tax advice. Thresholds and rates change, so confirm the current position with an adviser in the relevant country before granting.