A perfect tax world for equity compensation doesn’t exist, but phantom equity can help alleviate the shortcomings of other forms of equity compensation. In Part 1 of a two-part series, Moses Singer’s Steve Lueker summarizes the existing tools for providing equity compensation.

When it comes to compensating an employee with a grant of equity, it is not a perfect world when considering the impact of taxation. A perfect world when granting equity compensation from a tax perspective would include at least the following:

• At the grant date, and as the grant vests, the employee receives no taxable income or gain;
• Upon a change in control, the employee receives the full value of the equity granted—for example, there’s no strike price or participation threshold subtracted from the proceeds;
• The proceeds received are taxed only upon a change in control, which is when the employer company is acquired, and the shareholders can cash-out their equity for dollars;
• The entire payout is long-term capital gain to the employee; and
• The employer can deduct the entire amount of the payout to the employee.