The Complete Private Company Equity Plan Blueprint

Recently, I read a whitepaper from Certent titled The Complete Private Company Equity Plan Blueprint – A comprehensive guide to building your program from the ground up. The whitepaper is quite thorough and discusses the use of equity in private companies and the related:

  • Plan Design
  • Plan Administration
  • Communication
  • Accounting

In addition, the paper has an audit checklist, a great value-add.

In our experience with private companies, executive teams are often challenged to compete with large, public companies for talent where those organizations have endless talent and funding resources to implement best practice equity plans. And, of course, the large, public companies have publicly traded stock that has advantages of volume and liquidity.

To compete in the marketplace for talent, private companies have to think outside of the box. Fortunately, private companies are good at this as they have an entrepreneurial spirit in their DNA; with that DNA, comes the interest by ownership to want their key people to have an owner mindset but without diluting ownership’s equity.

A valuable alternative for private companies to be competitive? Phantom stock plans . This diagram illustrates how phantom stock fits into an overall compensation and benefit strategy:

EBS has created a webinar-on-demand that brings together the key concepts of implementing a phantom stock plan.


The Certant whitepaper describes the considerations for determining what percentage of equity a company should offer in its equity plans. The hard part of this step, however, is to model out the plan variables and scenarios by title, company performance (Multiple of EBITDA? Multiple of Revenue? Multiple of profit?), employee performance, and financial impact to the company

EBS has created a phantom stock plan modeler to help create these detailed scenarios and their financial impact, available at:

Phantom Stock Plan Modeler


A phantom stock plan creates a liability on the sponsoring company’s books. While a plan does not require cash funding, it may be important to plan participants to know that the company is backing up the promise with funding:

  • To provide a degree of benefit security to participants
  • To match plan liabilities with a pool of assets; and
  • To reduce plan cost through tax-advantaged pre-funding.

There are several approaches to plan funding: sinking funds, corporate owned life insurance, mutual funds, and other assets. A detailed funding analysis is necessary to determine the funding type most appropriate for a company.


If funding is set aside, a company can move out from under the regulatory clouds by segregating funds into a Rabbi Trust. The company has a fiduciary obligation to protect your select group’s phantom stock. The essential tension in nonqualified plan design lies between the need to maintain the plan as unfunded (so that benefits are not currently taxable and the plan is not subject to most of Title I of ERISA), but still secures employee benefits.

The most common solution to this dilemma is a Rabbi Trust, which is an irrevocable, employer-established grantor trust set-up by the company to hold assets, separate from the other company assets, for the purpose of paying future participant benefit obligations.

At the centerpiece of a Rabbi Trust is the employer-owner’s commitment to place investments in the trust and to earmark these investments to fund obligations under the plan. A frequent issue in phantom stock plans arises over how does the employer-owner informally fund his or her promise to pay plan benefits.

The Rabbi Trust protects participants from financial events caused by change in control or change in heart of the employer. However, in order for the phantom stock plan and the participant accounts to maintain the tax-deferred status, the assets of the Rabbi Trust are available to general creditors of the company in the event of the company’s insolvency, which means they are subject to the claims of the company creditors.


Trevor K. Lattin
Managing Director
Executive Benefit Solutions