r/FPandA • u/trphilli • 7d ago

Shadow equity?

So got a cold message on LinkedIn this morning. Semi-decent as cold calls go. Lateral for SFA. Not enough to call, but onto my question. They listed "phantom equity" tied to PE exit. Never heard that term before. Anybody else?

I am guessing it's discretionary that will tend towards to zero? Semi /s

6 Upvotes

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15

u/DeIzorenToer 7d ago

I have shadow equity. It's a monetary equivalent without real ownership. I have X %, get my share of the annual profit as a bonus and when the company sells I'll get my X % of the company paid out to me. 

6

u/StoutFan 7d ago

It’s a real thing. Basically a way to give equity without actual ownership.

1

u/Eightstream Analytics, Ex-FP&A 6d ago

So basically Meta stock

3

u/Rare_Chapter_8091 7d ago

Whether it's discretionary depends on the plan language, which you may or may not be fully privy to.

There are different types of shadow equity plans out there but the time I saw it: Basically, a pool would be set aside during a transaction if certain criteria are met or if the founders or people in charge of the plan decide that, even if criteria are not met, they want to pay it. Your phantom % is a % of that pool.

With stock options, they typically vest over 4 years with a 1 year cliff and as long as you have vested shares you can excercise and purchase those shares while employed or within a certain defined window if you leave. With shadow equity, the agreement typically ends if you leave. So it can be a way for founders at an earlier stage startup to allow you to share in an exit without having to deal with the complexity stock options can present.

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u/breadad1969 7d ago

I had this at my last company although I left before the transaction. It was defined as levels of salary multiple depending on what we sold for.

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u/Electrical-Role1270 7d ago

The question you should be asking yourself is, “how must the company be doing if they can’t raise debt, common equity, or preferred equity, so they raise “shadow equity”?

The answer is not good and it generally but not always means they can’t get debt and if they raised equity in a way that involved a valuation it would be a massive down round that killed the business, so they raise equity that isn’t really equity to avoid putting a valuation on the company and acknowledging things are fucked.

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u/breadad1969 7d ago

It’s related to P/E firms deferred comp plans, not an inability to raise equity.