This Q is driven by both some recent run-ins with Phantom Stock in its newer form, and by an Anon question here: https://www.proformative.com/questions/phantom-stock-plan-private-company-700-employees-05b-revenue-10m-ni
My basic question, in 3 parts: Assume a private company, later-stage (revenue, heading toward profitability) puts in a Phantom Stock plan that is triggered only by a change of control (M&A, IPO...that sort of thing). It pays the holder of a Phantom Stock "unit" the equivalent of what a preferred holder would get in cash, not counting what the preferred holder paid in. So, let's say a holder of a Preferred Share gets (net of costs) $10 for that share in an M&A event. The holder of a Unit would also be due $10. Two features of this are that it is a vesting thing, so that you need to be vested in order to get paid. It is also *not* like restricted stock, wherein if you leave prior to the change of control, you forfeit all rights and don't get anything. This is in essence a "bonus" payable upon successfully driving the company to an M&A, and never ever has any equity rights, nor is it debt. Q1) This smells like straight comp. Does anyone have experience in handling this in an 83B-election or similar structure where it becomes a capital gain and not income? Q2) The forfeit-on-departure; that's a red flag for me. Is that common? I've *seen* it commonly, but it seems to be a bit lopsided, given that there is also vesting. Q3) Do you account for this thing? How? There is some guidance out there referring to ASC 718-10-35-8, however, the forfeiture issue weighs heavily on my mind; additionally the valuation seems...troublesome? Do a 409a on grant, and you're probably undercalling it. Thanks! Keith
