When you’re building a business, it’s normal to want to reward the people who help you grow - especially early team members who take a chance on you. But giving away real shares too early can create admin headaches, investor concerns, and tricky tax and governance issues.
That’s where a phantom share agreement (sometimes called a phantom equity plan) can be a really practical solution.
This article is updated for current New Zealand business conditions and expectations (including what investors and savvy hires commonly look for now), and we’ll walk you through what phantom shares are, when they make sense, and why having the agreement properly drafted matters.
What Is A Phantom Share Agreement (And How Does It Work)?
A phantom share agreement is a contract that gives someone an economic benefit linked to shares - without actually issuing them shares in your company.
In simple terms, you’re saying:
- “You don’t own shares.”
- “But if the business grows (or is sold), you’ll receive a payment calculated like you did.”
That payment is usually linked to one or more of the following:
- Company valuation growth (eg, the increase in value between the start date and an exit event)
- Dividends (or dividend equivalents) (less common for startups, but sometimes used)
- Sale proceeds (eg, a portion of what shareholders receive when the company is sold)
- Performance milestones (eg, only triggered if revenue, EBITDA, or other targets are hit)
Phantom shares are “phantom” because they mirror the value of shares without being actual shares recorded on your company’s share register.
Phantom Shares Vs Real Shares: The Big Difference
If you issue real shares to someone, they may gain:
- Voting rights (depending on the share class)
- Information rights (depending on the arrangement)
- Rights on a sale, liquidation, or dividend
- Ongoing ownership - even if they leave (unless you have strong buyback/bad leaver rules)
With phantom shares, the person usually gets a contractual right to be paid in certain circumstances - and you can tightly control when, how, and whether that payment happens.
This is very different to “owning part of the company”.
When Do Phantom Share Agreements Make Sense For NZ Businesses?
Phantom equity can be a great fit when you want to incentivise and retain key people, but you’re not ready (or willing) to restructure your cap table.
Common situations where phantom shares make sense include:
You’re A Startup That Wants To Incentivise Early Employees
If you’re hiring a key engineer, sales lead, operations manager, or growth marketer, they may reasonably ask: “How do I share in the upside?”
You might not want to give away real shares yet - especially if you:
- Expect to raise capital soon
- Want to keep your shareholding simple for investors
- Haven’t fully agreed founder equity splits long-term
In these cases, phantom equity can provide a clear incentive while keeping ownership clean.
You Want To Reward Contractors Or Advisors Without Making Them Shareholders
Advisors and contractors can add real value, but turning them into shareholders can create long-term complexity. A phantom share agreement can be a middle ground - particularly if you’re already using solid contractor documents such as a Contractor Agreement and want to add an upside incentive.
You’re Protecting Control (Voting And Decision-Making)
Even a small shareholding can create governance issues, especially if the relationship changes later. If you issue real shares, you’ll often need to manage decisions through a Shareholders Agreement, and you may also need to consider whether your Company Constitution should be updated to reflect new rules.
Phantom shares avoid that. The person remains not a shareholder, which helps you keep voting and control more straightforward.
You Want A Clear “Exit Bonus” Structure
Many phantom share plans are built around a defined “exit event” - for example, if the company is sold or a major capital raise happens.
This can be especially useful if your business is being built for acquisition and you want key people focused on long-term value, not just short-term salary.
What Are The Key Benefits Of A Phantom Share Agreement?
A good phantom share agreement isn’t just a “nice-to-have”. For many businesses, it’s a strategic tool that lets you grow while staying protected from day one.
Here are the main benefits we see for NZ founders and business owners.
1) You Can Offer Upside Without Giving Away Ownership
This is the headline advantage. You can reward and retain people while avoiding:
- Issuing new shares
- Changing your cap table
- Creating new shareholder rights
- Needing shareholder approvals for future steps (depending on your structure)
A phantom share plan is contractual, so you can design it around what actually matters to your business.
For example, you can build in:
- Vesting schedules (eg, vesting monthly over 3–4 years, often with a cliff)
- Good leaver / bad leaver outcomes
- Milestone-based vesting (eg, only vest after product launch or revenue targets)
- Discretionary rules for edge cases (with clear guardrails so it’s still fair and enforceable)
This is similar in concept to a Share Vesting Agreement, but phantom equity can be much simpler to administer because you’re not dealing with actual share transfers.
3) It Can Be Cleaner For Future Investors
Investors typically want to understand exactly who owns what, and what rights exist. If you’ve issued lots of small parcels of shares, it can slow down:
- due diligence
- cap table clean-up
- shareholder approvals
With phantom equity, you’re often dealing with a smaller number of contracts rather than lots of shareholders. That can make the business easier to invest in - provided the phantom plan is drafted clearly and you’ve managed disclosure properly.
4) It Helps Retain Key People (Without Overpaying Salary)
Cash is tight in many early-stage businesses. Phantom shares can help you compete for talent by offering a meaningful upside incentive, without committing to a salary level that strains your runway.
That said, it’s important that your incentive structure matches your employment documentation. For employees, the incentive should sit alongside a properly drafted Employment Contract so expectations around confidentiality, IP ownership, and termination outcomes are aligned.
What Should A Phantom Share Agreement Include?
Phantom share agreements can look quite different depending on your business model, whether you’re venture-backed, and what you’re trying to incentivise. But in most cases, there are some core terms you’ll want to cover clearly.
Eligibility And Participation
- Who can participate (employees, contractors, advisors)
- Whether participation is discretionary
- Whether the plan is ongoing or a one-off grant
The “Phantom Share” Calculation
You’ll need to define what a phantom share actually means in your plan. For example:
- Is it tied to a specific number of notional shares?
- Is it a percentage of sale proceeds?
- Is it based on growth in valuation?
This section needs to be drafted carefully, because vague formulas are where disputes often start.
Vesting Rules
Vesting is one of the most important parts of the agreement. It answers: When does the person actually earn the benefit?
Common vesting options include:
- Time-based vesting (eg, 25% after 12 months, then monthly)
- Milestone vesting (eg, vesting after a product release)
- Hybrid vesting (time + performance)
Trigger Events (When Payment Happens)
Most phantom plans are designed to pay out on a specific trigger. For example:
- sale of the company (or sale of a controlling stake)
- IPO/listing (rare for most SMEs but still possible)
- some forms of major capital raise
- dividend events (if you want dividend equivalents)
You also need to define what doesn’t count as a trigger, so everyone’s expectations are realistic.
Leaver Provisions (What Happens If Someone Leaves?)
This is where phantom share agreements really earn their keep.
You’ll usually want rules for:
- Good leavers (eg, redundancy, illness, mutual separation)
- Bad leavers (eg, serious misconduct)
- Resignation and how notice periods affect vesting
- what happens to unvested phantom shares
- whether vested phantom shares are forfeited, paid out, or remain on foot until an exit
These clauses need to align with your employment processes, because if you get a termination wrong, it can quickly turn into a broader dispute.
Tax Treatment And Payment Mechanics
Phantom shares are generally structured as a right to receive a payment in the future. That means they may be treated like income (rather than a capital gain) for the recipient, depending on how the arrangement operates and when payments are made.
You should also spell out practical payment details, including:
- how the payment will be calculated
- when it must be paid after a trigger event
- whether PAYE applies (often relevant if it’s employment-related)
- whether the company can withhold amounts required by law
Because tax outcomes depend heavily on the structure and the person’s circumstances, it’s smart to get tailored legal and accounting advice rather than relying on a generic template.
Confidentiality, IP, And Restraints
Phantom equity is usually offered to people who will have access to sensitive business information. So the agreement often needs to work alongside your confidentiality and IP protections.
Depending on the role, you might also want to make participation conditional on signing a Non-Disclosure Agreement or ensuring your employment/contractor documents clearly assign IP back to the business.
What Are The Risks Of Not Having A Proper Phantom Share Agreement?
You can agree to “give someone 2% of the company when we sell” in a quick conversation - but if it’s not properly documented, you’re setting yourself up for misunderstandings at the exact moment your business should be celebrating a big milestone.
Here are the big risks we see when phantom equity is handled informally.
Misaligned Expectations (And Disputes At Exit Time)
Without clear definitions, people may assume:
- they have shareholder rights (when they don’t)
- they’re entitled to a payout on any fundraising (even if the plan was intended to pay only on a sale)
- their payout is based on headline valuation rather than net proceeds after liabilities and preferences
Exit events are high-stakes and time-sensitive. A dispute at that point can slow the deal down, trigger demands for settlement, or complicate due diligence.
Accidental Promises That Are Hard To Walk Back
If you’ve repeatedly represented that someone will receive a benefit, and they’ve relied on that promise (for example, by accepting a lower salary), it can become harder to renegotiate later - even if you didn’t intend to create an enforceable arrangement.
A properly drafted agreement helps ensure everyone knows exactly what’s being offered.
Confusion About Whether It’s “Equity” Or “Pay”
Because phantom shares are usually paid in cash, they can look like a bonus arrangement. If that’s not structured carefully, you risk unclear outcomes around:
- what happens if the person is terminated
- whether the benefit is discretionary or contractual
- how disputes about performance are resolved
Clear drafting gives your business certainty and gives the participant confidence that the incentive is real.
Investor And Buyer Concerns During Due Diligence
If a buyer or investor discovers undocumented or poorly documented incentive promises, they may treat it as a liability risk.
They might ask:
- Who has been promised payouts?
- What are the triggers?
- What’s the maximum exposure?
- Are there any disputes brewing?
Having a clean phantom share agreement helps you answer those questions quickly and confidently.
Key Takeaways
- A phantom share agreement lets you reward someone based on the company’s success without issuing real shares or giving them shareholder rights.
- Phantom equity can be a good fit for NZ startups and growing businesses that want to incentivise employees, contractors, or advisors while keeping ownership and voting control simple.
- A well-drafted agreement should clearly cover the calculation method, vesting, trigger events, leaver provisions, payment mechanics, and how it interacts with employment and confidentiality arrangements.
- Without proper documentation, phantom equity promises can lead to disputes, misaligned expectations, and red flags during investor or buyer due diligence.
- Because the right structure depends on your business model and goals, it’s worth getting tailored legal advice rather than relying on a generic template.
If you’d like help putting a phantom share agreement in place (or reviewing an existing incentive plan), you can reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.
