Free Phantom Stock Agreement Template for Small Businesses

What is phantom stock, and how does it help keep key employees?

Phantom stock is a small business-friendly, ultra-flexible way for a company to give its employees skin in the game. When used as part of an incentive plan, it creates employees who think like owners.

You can choose how much you'd like to grant, along with the event that triggers a future payout. There are a variety of properties that make phantom stock unique, including one that requires staff to be employed at the time of a payout, incentivizing them to stay with the company.

Unlike stock options, you'll get to keep 100% of your company, only parting with a percentage of profits made on a sale of your business or other future event of your choosing.

What’s Inside the Phantom Stock Agreement Template

Here’s what’s inside the phantom stock agreement template:

Definitions & Parties: Lays out who’s involved and what key terms mean, so there’s no confusion later.
Grant of Phantom Units/Shares: Explains how many phantom units or shares are being issued to the grantee.
Vesting (time/performance): Covers how units vest and what the vesting date will be—based on time, performance, or both.
Valuation Method & Cadence: Details how the value of phantom units is set and how often it’s updated.
Triggers & Payouts (lump sum/installments): Lists the events that trigger a payout and whether it’s paid all at once or over time.
Caps/Floors: Sets limits on how much can be earned or lost, so there are no surprises.
Forfeiture & Termination: Explains what happens to phantom units if someone leaves or is let go.
Non-compete/Non-solicit (optional): Optional section to help protect your business if someone leaves.
Clawback: Gives the company the right to take back payouts in certain situations, like misconduct.
Grant of Phantom Units/Shares: Explains how many phantom units or shares are being issued to the grantee.
Change-in-Control: Outlines what happens to phantom units if the company is sold or merged.
409A Compliance Language: Includes the legal language needed to keep the plan in line with IRS rules.
Administration & Notices: Explains how the plan is managed and how official notices are handled.

How to Use the Phantom Stock Agreement Template

Here’s how to use the phantom stock agreement template:

What type of company are you? (LLC, S Corp, C Corp, Other) The agreement language changes based on your entity type. LLCs use “phantom units” and keep employees on W-2s (no K-1s). S Corps and C Corps use “phantom shares.” Pick your current entity—you can convert later without rewriting the whole plan.
Number of employees you wish to give phantom stock This helps size your initial award list and sample schedules. Start with the 2–10 people you most need to hire or keep. You can add more later.
Total employees at the company (other than you) This guides language around eligibility and communications. Some benefit rules, like ERISA, may apply at higher headcounts.
Do you want to profit share? (Yes / No) If yes, the phantom stock agreement template includes dividend-equivalent or profit distribution clauses so holders can share in periodic profits—not just exit value. If cash is tight, select No for now. You can add it later.
What percentage of the company should be set aside (pool)? This sets your phantom pool for grants. Most SMBs in the trades set aside 5–15%. Start small and top up later if needed. Larger pools mean bigger potential payouts, so pair with installment language.
What’s the primary purpose fr setting up a phantom stock plan? Hiring a key employee, anticipating a sale, looking to grow aggressively, just doing research, being proactive, or replacing a key employee who just left? Your goal helps adapt triggers and vesting.
What industry is your company in? Tell us your industry so the phantom stock agreement uses language that makes sense for your company. Choose the closest match.
Enter your state This sets governing law and adds notes for non-compete/non-solicit sensitivity. If your company operates in more than one state, pick your HQ state. You can change it later.
Your information We'll send you a copy of your customized phantom stock agreement.

Bring Your Phantom Stock Template to Life With Reins

Our phantom stock agreement template draft gives you a great start—now let’s make it real. Reins helps small businesses design, implement, and manage phantom stock programs without expensive lawyers, spreadsheets, or guesswork. Instead of wasting months and tens of thousands of dollars, you'll get a fully-functioning phantom stock plan set up in just a few weeks.

How Reins works

Design: We tailor vesting, valuation cadence, triggers, and payout rules to your business, state, headcount, pool size, and goals (hiring, growth, or sale).
Grant: Issue legally-binding awards in clicks (units/shares, schedules, performance add-ons).
Manage: Track grants, vesting, triggers, and payouts in one place.

Small business owners like you are already using it:

Wirenut kept their top techs by rolling out phantom equity.
Wes Carver Electric gave employees a real stake in growth—without losing control of the business.
Cooper’s Plumbing and Air is using phantom stock to attract better talent.

Here's what owners like Tony Cooper of Cooper's Plumbing & Air had to say about using Reins, and seeing the impact on his team:

I can feel a culture shift as we have implemented this and put it right in their hands, the potential opportunity that they have in front of them

Phantom Stock Agreement vs Phantom Stock Plan

A phantom stock agreement spells out the rights and terms for an individual’s award. It covers things like vesting, how the award is valued, and how and when payouts happen. Each grantee gets their own agreement.

A phantom stock plan is the bigger picture. It sets the company-wide rules—who’s eligible, how big the overall pool is, and how the program is governed. The plan is the foundation. The agreement is the personalized offer built on top.

Types of Phantom Stock Plans: Full Value and Appreciation-Only

There are two main types of phantom stock plans: full value and appreciation-only. In a full value phantom stock plan, employees receive units that track the total value of company stock, so their payout reflects the entire value of the shares at the time of payout, making it an attractive component of an effective incentive plan. In contrast, an appreciation-only phantom stock plan pays out only the increase in value from the time the units are granted to the payout date—employees benefit just from the company’s growth, not the original value.

The key difference is that full value plans reward both the base value and any growth, while appreciation-only plans reward just the growth. For a deeper dive, check out Types of Phantom Stock Plans: Full Value and Appreciation-Only.

Common Mistakes (and How to Avoid Them)

Here are some common mistakes companies make with phantom stock agreements—and how to avoid them:

No stated valuation method or cadence: If you don’t spell out how and when the company will be valued, payouts can get messy and lead to disputes. Always include a clear valuation method and how often it will be updated.
Vague trigger definitions: If it’s not clear what events trigger a payout (like a sale, retirement, or termination), you’re asking for confusion and headaches later. Define triggers in plain language.
Missing installment option or cash-flow plan: Paying out a large sum all at once can strain your company. Build in the option to pay in installments so you can manage cash flow and payment schedules when payouts are due.
No 409A language: Leaving out IRS Section 409A compliance language can create tax consequences for both the company and employees. Make sure your agreement includes the right legal language.
Forgetting forfeiture and leaver rules: If you don’t cover what happens when someone leaves—voluntarily or not—you risk overpaying or creating unfair situations. Spell out forfeiture and leaver rules up front.

FAQ

Is this a legally binding agreement?

Yes, when signed, this is a legally binding agreement. But you should always review it with your counsel. The template is meant to speed up drafting, not replace legal advice. If you'd like help putting this phantom stock agreement into place, you can book a free call with our team.

Does phantom stock cause dilution?

No. Phantom stock is cash-settled and doesn’t issue real shares, so it doesn’t dilute ownership.

Do we need annual valuations?

You’re not required to do annual valuations like with ESOPs, but you should set a clear valuation cadence in your plan. This keeps things fair and transparent.

Does Section 409A apply?

Yes. Section 409A covers timing and valuation rules for phantom stock. Make sure your plan follows these rules to avoid tax issues.

Can 1099 contractors be included?

Usually, phantom stock is for W-2 employees only. Including contractors is rare and can get tricky—talk to your legal or tax advisor before doing this.

What vesting schedule works best?

A 3–5 year graded vesting schedule is common. You can also add performance-based vesting to reward hitting key goals. This makes the incentive plan aligned with the business goals.

Ready to put your phantom stock agreement to work?

Reins makes it simple for business owners to roll out phantom stock programs—without lawyers, headaches, or giving up real equity.

Customizable: vesting, valuation cadence, triggers, and payments.
Employee-ready: award letters, employee portal, clear rollout with detailed information on employee benefits.
Hands-off admin: track grants, vesting, and payouts in one place.