If you’re a founder or manager of a Spanish startup exploring ways to incentivize your team, you’ve likely encountered two attractive options: Phantom Shares (also referred to as “phantom stock” or “virtual shares”) and Stock Options. Both instruments aim to align your employees’ interests with the company’s long‑term success, but they operate in different ways and carry distinct implications—especially regarding tax and administrative complexity.
What Are Phantom Shares?
Phantom Shares (also known as “phantom stock” or “virtual shares”) are contractual rights granted to employees (or other stakeholders) that promise a future cash payout based on the increase in the company’s value. With phantom shares, employees do not receive actual equity or voting rights; instead, they benefit from a bonus that “mirrors” the appreciation of the company’s real shares.
Key Attributes:
No Ownership Dilution:
Phantom shares do not involve issuing new shares, so existing shareholders retain their ownership percentages.Simplicity and Flexibility:
The contractual nature of phantom share agreements means you can tailor vesting schedules, performance conditions, and payout events to fit your startup’s needs without the need to amend corporate bylaws or navigate shareholder agreements.Tax Simplicity for Employees:
Employees are typically taxed on phantom share payouts as standard employment income when the payout occurs—usually tied to a liquidity event or a significant increase in company value. This approach avoids the need for employees to make an upfront financial investment or face unexpected tax liabilities prior to realizing benefits.
Because phantom shares bypass many of the formalities associated with issuing real equity, they have become a popular solution for Spanish startups where administrative resources or legal complexities might otherwise pose a challenge.
What Are Stock Options?
Stock Options give employees the right—but not the obligation—to purchase company shares at a predetermined “exercise” price within a specified timeframe. This instrument is widely used among Spanish startups, particularly in sectors like tech and innovation, as it offers the prospect of real equity participation and, when structured properly, can yield favorable tax treatment.
Key Attributes:
Real Equity Potential:
Upon exercising their options, employees acquire actual shares, which can lead to long‑term wealth building if the company’s value grows.Incentive Alignment:
Since the benefits of stock options are directly tied to the company’s share price appreciation, employees are encouraged to contribute to the company’s success.Potential Tax Advantages:
Well‑structured stock option plans can sometimes result in the gains being taxed as capital gains rather than as ordinary income. However, it is important to note that tax liabilities may be triggered at the time of exercise—even if the shares have not yet been sold—so careful planning and consultation with tax experts are essential.Vesting and Performance Conditions:
Stock options typically include vesting periods and performance milestones, ensuring that the benefit rewards long‑term commitment and achievement.
While stock options involve more complex administration (including issues of share dilution and upfront tax considerations), they offer a tangible pathway to equity ownership that many employees find highly motivating.
Why Consider Phantom Shares or Stock Options?
Both phantom shares and stock options serve as effective incentives, but each has unique benefits that can be matched to your company’s stage and strategic needs:
Retention & Incentive Alignment:
Whether offering a future cash bonus (phantom shares) or the potential for real equity (stock options), both methods motivate employees to drive long‑term value creation.Ownership & Dilution Considerations:
Phantom Shares: Maintain existing ownership structures since no actual shares are issued.
Stock Options: May dilute existing ownership but provide employees with a stake in the company’s growth.
Tax Implications:
Phantom Shares: Typically taxed as employment income upon payout, offering simplicity and predictability.
Stock Options: Can trigger tax liabilities at exercise; however, if structured correctly, gains may later be taxed at favorable capital gains rates.
Administrative Complexity:
Phantom shares generally require less legal and administrative overhead, making them attractive for early-stage companies without extensive legal teams. Stock options, while potentially more complex, offer the reward of actual share ownership, which can be a powerful retention tool.
ESOP Valuation Checklist for Spanish Companies
Use the following questions to evaluate whether a (new) valuation is required for your ESOP plan:
Do you plan to offer Stock Options or Phantom Shares to your employees, key management, or advisors?
If yes: You should consider getting a valuation to establish the initial “virtual” share price and track future price changes.
Is your current valuation estimate outdated (e.g., more than 12 months old)?
If yes: A new valuation is recommended, especially if there have been notable changes in your finances or market conditions.
Have you experienced a material change in your business?
If yes: It is advisable to update your ESOP valuation to reflect the shift in company value.
Are you approaching a significant event (e.g., financing round, M&A)?
If yes: A valuation can provide a fair baseline for determining ESOP payout obligations.
Do you have a complex capital structure?
If yes: If you’ve issued different share classes, convertible notes, or have multiple investors on your cap table, it’s advisable to seek a thorough valuation.
If you’re unsure, consult a qualified advisor in Spanish corporate and labor law.
What Is a Material Change That Triggers a New ESOP?
A material change is any event or development that significantly affects your company’s value. In Spain, these are some common triggers:
1. Financial Changes
Equity or Debt Financing: Whether it’s a new funding round, significant bridge financing, or issuance of convertible instruments.
Revenue Swings: Sharp increases or decreases in turnover due to a large contract win or loss.
Debt Restructuring or Issuance: Includes convertible notes with valuation caps, or alternative loan structures.
2. Corporate Events
Mergers and Acquisitions: Selling a major business unit, acquiring another company, or merging with a competitor.
Restructuring: Shifts in corporate governance, changing the legal form of your entity (S.L. to S.A., for example), or making significant amendments to the bylaws.
3. Operational and Market Shifts
Strategic Partnerships: Securing high-impact contracts that significantly transform your market position and growth expectations.
Market Conditions: Changes in the broader Spanish or European market that might boost or undermine your competitive edge.
Regulatory Developments: Especially important if your business operates in heavily regulated sectors such as fintech, healthcare, or energy.
Why use Equidam for ESOP Valuation
Calculating a valuation yourself is the most cost-effective option for early-stage Spanish companies issuing Stock Options or Phantom Shares. Conducting the valuation on Equidam offers three key benefits:
Audit and Legal Defensibility
A standardized, transparent valuation process can help you defend the fairness of your incentive program if challenged by tax authorities or in labor disputes.
Enhanced Credibility with Employees and Investors
Demonstrating objectivity and transparency when implementing your ESOP plan fosters trust with both current and future talent, as well as with new investors.
Instructive Content and Guidance
The Equidam platform contains a wealth of information that helps you understand best practices for valuation, and we’re on hand to help you get to grips with the platform.
You can obtain a professional valuation through our platform, which uses multiple robust methods (qualitative methods, DCF, market multiples, etc.) and provides a transparent, detailed valuation report.
If you're unsure about the best way to proceed with your valuation, feel free to get in touch with us and we'll point you in the right direction.
Conclusion
For Spanish startups, designing an employee incentive plan is about more than just compliance—it’s about fairly compensating and motivating your team for long‑term success. Phantom Shares offer a simpler, less administratively burdensome solution with straightforward tax treatment at payout, while Stock Options provide a pathway to actual equity ownership with the potential for favorable capital gains taxation if structured appropriately.
If you’re still unsure, review the checklist, consider your company’s specific milestones, read our article on common mistakes and best practices for ESOP valuation, and feel free to reach out to us for guidance on the best path forward.