I always give away equity in my companies…this is why..

Summary

• Phantom equity is a vehicle to incentivize employees without giving away actual equity; it can boost their motivation and tie their wealth-building potential to the company's success.
• In my experience, aligning employee interests with business growth by offering wealth-building opportunities like phantom equity has improved my own wealth.
• The more money I help others make, including employees, the more I increase my own earnings – this mirrors Sam Walton's approach that propelled Walmart's growth.
• Phantom equity only vests upon specific triggers, such as a business sale or a change in ownership, increasing employee focus on company value.
• For employees, phantom equity is beneficial as it poses no tax liability until vesting events and doesn't expose them to the business's financial risks.
• From a company owner's viewpoint, issues like dilution of ownership are avoided, and it provides a mechanism to retain key employees.
• I prefer phantom equity as a wealth-building and incentive tool over profit sharing, keeping the company's profits within the core operation.
• Key leaders might receive 0.5% to 2% in phantom equity, while a senior executive critical to the business could get up to 5%, based on the company's value and their individual impact.
• Overall, understanding how phantom equity can align employee goals with business objectives is crucial in creating a unified, forward-moving team.

Video

How To Take Action

I would suggest starting by understanding what phantom equity is. It's like a reward for employees, but it's not real shares of the company. It's a promise that they can earn money when big things happen for the company, like being sold.

Let's make employees excited to grow the company by tying their success to ours. By using phantom equity, they can make money when the company does well, and they don't have risks like if they owned actual shares. This makes them think like owners without the stress.

Here's a simple way to use phantom equity: For important leaders, think about giving them between 0.5% to 2%. If someone is really key, like they run a big part of the company, they might get up to 5%. But remember, they only get this money if something big happens.

To keep employees around and focused, make a plan that shares the phantom equity over time. For example, if you promise someone 5%, maybe they get 1% each year for five years. If they leave early, they might lose what they haven't got yet. This helps the company and the employee stay together longer.

When you offer phantom equity, your team starts to think about making the company more valuable, not just their paychecks. It helps everyone move in the same direction and work harder. It's how you make a bigger "pie," so everyone gets more.

Don't forget; this isn't about sharing the company's profits right now. It's about the promise of sharing in the big wins later. It's a smart way to help everyone win without taking money from the business when it's not ready.

Lastly, using phantom equity helps your employees build their wealth. When they're doing better, they're happier, and so is the company. This way, you're helping them grow just like they help the company grow. Isn't that what teamwork is all about?

Quotes by Alex Hormozi

"In order to grow my slice of the pie, it's better to get a bigger pie and have more people get wealthy"

– Alex Hormozi

"One of my rules of life is the more money I make other people, the more money I make"

– Alex Hormozi

"The objective of phantom equity is to get owner-like thinking and owner-like engagement among people who are not majority owners of the business"

– Alex Hormozi

"The best people want a stake because winners win and they know they're going to win so they want to be able to participate in the upside"

– Alex Hormozi

"The more aligned I can make my team and their life outcomes with my personal life outcomes, then the more aligned we will be"

– Alex Hormozi

Full Transcript

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 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 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 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 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 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 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 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 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 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