Syndicate Legal Advisory Services prepares the complete set of documents required for a corporation, LLC, partnership, or other business to adopt a phantom equity plan and to grant phantom equity awards — contractual rights to receive a cash payment measured by the value of a stated number of shares or units, or by the appreciation in that value, without the recipient ever becoming an owner — to employees, officers, directors, advisors, consultants, or contractors, in any U.S. state. Phantom equity is used where the owners want to give key people the economic upside of ownership without diluting control, without admitting new owners to the governing agreement, without creating securities-law or S-corporation eligibility problems, and without the valuation and buyback complications that real equity brings on a departure; it is especially common in family businesses, professional practices, S corporations, and LLCs whose operating agreements make the admission of new members impractical. Because a phantom award is a cash bonus deferred to a future event, it is deferred compensation under Section 409A unless structured to fit the short-term deferral exception, and the plan must either fit that exception or comply with 409A’s rules on payment events, timing, and the prohibition on acceleration; it is also an unfunded promise, so the recipient’s rights depend on the company’s solvency and on the plan’s design. Working from the client’s answers to a structured intake and from the company’s governing documents, capitalization records, and valuation, we draft the plan and award documents to satisfy Section 409A, ERISA’s top-hat exemption where it applies, and the employment and tax rules that bear on the arrangement, together with the approvals, the valuation methodology, and the administration tools the company will use for every grant and payment that follows. Valuation fees, actuarial or accounting fees, and other third-party charges are not included in the flat fee and are the sole responsibility of the client.
Scope of work includes:
Plan design planning and intake — a structured intake and written summary confirming the entity’s type, state, and tax classification; the owners’ objectives and the reasons phantom equity is preferred to real equity; the participants and their relationship to the company; the award type — full-value phantom shares or units (paying the full value at settlement) or appreciation-only awards (paying the increase in value from grant, functioning as a cash-settled SAR); the number of phantom units and the percentage of the company’s value they represent; the valuation methodology — a formula based on book value, earnings, or revenue, an annual appraisal, the price in a sale of the company, or a combination — and the fairness and consistency of applying it on each payment event; the vesting schedule and conditions; the payment events — a sale of the company, a specified date, separation from service, death, disability, or a fixed schedule — and the Section 409A structure that fits them; the payment form and installment terms; the treatment on termination for cause, breach of covenants, or competition; the dividend-equivalent policy; the top-hat eligibility if the plan is offered to a select group of management; and the funding arrangement, if any (a rabbi trust or company-owned life insurance), consistent with the unfunded requirement.
Review of existing documents — review of the charter and bylaws or the operating or partnership agreement (for any provisions on compensation plans, profit-sharing, or investor consent), the capitalization table, existing bonus, deferred-compensation, or equity plans, the participants’ employment or engagement agreements and any equity promise in them, and prior approvals, with a written summary of the approvals required and the provisions the plan must accommodate.
Phantom equity plan — drafting of the plan in full, addressing: the purpose, definitions, and eligibility; the number of phantom units authorized and the adjustment for changes in the company’s capitalization; the administration provisions and the administrator’s discretion; the award grant, the vesting conditions, and the forfeiture on termination; the valuation methodology and the valuation-date mechanics, the dispute procedure, and the binding effect of the administrator’s determination; the payment events and the payment timing drafted to the short-term deferral exception or to a 409A-compliant specified-time, separation-from-service, change-in-control, death, or disability trigger, with the six-month delay for specified employees of a public company and the prohibition on acceleration or further deferral except as the regulations permit; the payment form, installments, and interest; the change-of-control provisions and the treatment of the awards in a sale; the dividend-equivalent provisions; the clawback, forfeiture-for-competition, and restrictive-covenant conditions where wanted and enforceable; the unfunded-status, general-creditor, and ERISA top-hat provisions; the tax withholding and reporting provisions; the no-ownership-rights statement confirming that participants have no voting, information, or ownership rights; the plan’s term, amendment, and termination (including the 409A rules on plan termination); and the governing-law, no-right-to-employment, and claims-procedure provisions.
Award agreements and forms — the form of phantom equity award agreement and notice of grant, with separate forms for employees and non-employees, the beneficiary designation form, the restrictive-covenant agreement where the covenants are separate, the payment election form where the plan permits a 409A-compliant election, and the form of award amendment.
Approvals — the board, manager, or partner resolutions adopting the plan, authorizing the phantom units, approving the forms of agreement, and delegating administration; the owner or investor approval where the governing agreement or an investor agreement requires it; and the resolutions approving the initial awards with the valuation of the units at grant.
Valuation and funding documentation — the written valuation methodology and the initial valuation under it, the engagement of an independent appraiser where the plan relies on appraisals, and, where the company elects to set aside funds, the rabbi trust agreement or the company-owned life insurance documentation (with the Section 101(j) notice and consent) structured to preserve the plan’s unfunded status.
Compliance documentation — the Section 409A compliance memorandum documenting the plan’s exemption or compliance structure, the ERISA top-hat filing with the Department of Labor where the plan covers a select group of management, the employment-law review of the covenants and forfeiture conditions under the applicable state’s rules, and the accounting documentation for the liability the awards create.
Deliverable: a complete, indexed phantom equity file (electronic and hard copy) containing the written summary of the review, the executed plan, the forms of award and election agreements, the approvals, the initial award agreements, the valuation methodology and initial valuation, the funding documents where used, the 409A memorandum and top-hat filing, the phantom unit ledger and administration toolkit, and the compliance calendar, with a signature-ready version of each document for execution by the company and the participants.