Who Should Receive Phantom Equity in a Small Business?

Phantom equity works best as a targeted tool, not a blanket perk. Here's how to think about who deserves a grant — and who probably doesn't.

Start with the question: who is hard to replace?

The clearest case for issuing phantom equity is any employee whose departure would genuinely hurt the business. This might be:

  • A general manager who runs day-to-day operations
  • A lead technician or specialist whose skills are difficult to hire for
  • A long-tenured employee who carries institutional knowledge
  • Someone who helped you build the business and who you'd want to reward in a meaningful exit

If you could replace the person within a few weeks without missing a beat, phantom equity is probably the wrong tool for them. A cash bonus would do the same job with less complexity.

Common recipients in small businesses

  • Operations and management: GMs, operations directors, office managers with significant responsibility
  • Senior or lead roles in skilled trades: lead electricians, head mechanics, senior technicians
  • Client-facing key accounts: long-tenured account managers or salespeople who own major relationships
  • Kitchen and hospitality leadership: head chefs, FOH managers in restaurants where turnover is the primary risk
  • Healthcare: clinic managers, lead practitioners in small practices

What about all staff?

Some owners want to offer phantom equity to every employee as a team-wide program. This can work, but requires more administration — more grants to track, more communication to do, and more potential payout exposure. If you go this route, consider tiering grant sizes by seniority, with larger allocations for senior roles.

For most small businesses, starting with 3–5 key people is more manageable than rolling it out to the entire team at once.

How to think about grant size

There's no universal formula, but a useful starting point is to think about what you'd want a key employee to receive if you sold the business for your target price. Work backwards:

  • If your business sold for $1,000,000 and you want your GM to receive $20,000, they'd need a 2% payout.
  • If your total unit pool is 10,000, a 2% share = 200 units.
  • That's the grant size.

You can model different scenarios — a $500K sale, a $2M sale — to make sure the payout feels meaningful at different outcomes without being uncomfortably large.

Contractors and non-employees

Phantom equity can be extended to contractors and key non-employees, though this adds some complexity. If you go this route, it's worth getting legal advice to make sure the agreement is structured correctly for someone who isn't a direct employee.

The bottom line

Phantom equity is most powerful when it's personal. Offering it to someone and explaining exactly why — "you've been critical to what we've built and I want you to share in what we sell it for" — is a retention conversation that a salary increase rarely replaces.