Phantom Shares vs Stock Options: The Complete 2025 Guide for Startups in the US, Canada, the UK, and Europe
Learn the key differences between phantom shares and stock options in 2025. We explain how both equity plans work across the US, Canada, the UK, and the EU — plus how to choose the right one for your startup.
💡 Why This Matters
As startups compete for top talent, offering equity compensation has become standard practice. But not every company can or should issue real shares.
That’s where phantom shares and stock options come in — two common ways to reward employees with a stake in your company’s success, without giving away full ownership from day one.
If you’re a founder, CFO, or head of people trying to design your first equity plan, this guide will help you understand the trade-offs, the legal differences across regions, and how to manage everything efficiently with a tool like Capboard.
1. What Are Phantom Shares?
Phantom shares (also known as shadow shares or phantom stock) are a cash-based incentive plan that mirrors the value of real shares — but without issuing actual equity.
When the company’s valuation increases or an exit event happens (e.g., acquisition or IPO), employees holding phantom shares receive a cash payout equivalent to what they would have earned if they held real shares.
In short: phantom shares simulate ownership, without giving voting rights or share certificates.
Example:
An employee receives 1,000 phantom shares when the company is valued at $10/share.
Three years later, the company is acquired at $30/share.
They receive a payout of $20,000 (the $20 increase × 1,000 shares).
2. What Are Stock Options?
Stock options give employees the right to buy shares of the company at a fixed price (the strike price) in the future.
If the company grows and the share price rises above the strike price, employees can exercise their options to buy low and potentially sell high — turning the difference into a gain.
Example:
You grant an employee 1,000 options at $1/share.
In four years, the company is valued at $10/share.
The employee exercises their options, pays $1,000, and owns shares worth $10,000.
This is the most common structure in startup ESOPs (Employee Stock Option Plans).
3. Phantom Shares vs Stock Options: Key Differences
| Feature | Phantom Shares | Stock Options |
|---|---|---|
| Ownership | No real equity issued | Real shares after exercise |
| Payout | Cash bonus based on share value | Gain from share price appreciation |
| Voting rights | ❌ None | ✅ Possible after exercise |
| Taxation | Treated as income when paid | Taxed on exercise and/or sale |
| Legal complexity | Lower | Higher (requires shareholder approval) |
| Ideal for | Mature or private companies | Startups planning long-term growth |
4. How Each System Works by Region
🇺🇸 United States
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Stock Options: The US has two main types:
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ISO (Incentive Stock Options): favorable tax treatment but stricter eligibility rules.
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NSO (Non-qualified Stock Options): more flexible but taxed as ordinary income upon exercise.
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Phantom Stock or Phantom Shares: Often used by private or family-owned companies that don’t want to dilute equity. Taxed as income when paid.
💡 In the US, stock options dominate early-stage startup compensation because of the well-defined 409A valuation framework.
🇨🇦 Canada
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Stock Options: Widely used under the Canadian Income Tax Act, where employees are typically taxed only when they sell the shares, not when granted.
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Phantom Shares: Known as Deferred Share Units (DSUs) or Performance Share Units (PSUs) in larger firms. Common among public or late-stage private companies.
Canadian startups often use hybrid plans that defer taxation until a liquidity event.
🇬🇧 United Kingdom
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Stock Options: The UK offers favorable tax-advantaged schemes like the EMI (Enterprise Management Incentive) plan. Employees are taxed on capital gains, not income, upon sale — a major advantage.
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Phantom Shares: Typically used by companies not qualifying for EMI. Simple to administer, with payouts at exit.
EMI remains the gold standard for UK startups under £30M valuation.
🇪🇺 European Union
Because equity laws vary across EU countries, the choice between phantom shares and stock options depends heavily on local regulation:
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Spain:
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Phantom shares (acciones fantasma) are simpler and common for startups that want flexibility.
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Real ESOPs require notarial updates and shareholder registry modifications — more complex.
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France:
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Popular plans include BSPCE (Bon de Souscription de Parts de Créateur d’Entreprise), a startup-friendly stock option format.
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Germany:
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Uses VSOPs (Virtual Stock Option Plans), essentially phantom shares tied to exit value.
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Netherlands:
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Phantom shares (known as SARs, Share Appreciation Rights) are widely accepted and tax-efficient.
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💡 Across the EU, phantom or virtual plans are often preferred before Series A, while real options become more common post-funding.
5. When to Use Phantom Shares vs Stock Options
Choose Phantom Shares if:
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You want to reward employees without diluting ownership.
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You’re still a private company with no short-term liquidity.
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You want a simple plan that doesn’t require shareholder approval.
Choose Stock Options if:
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You plan to raise multiple rounds or go public.
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You want employees to hold real equity.
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You’re in the US, UK (EMI), or France (BSPCE) where stock options are tax-efficient.
6. Tax Implications at a Glance
| Country | Phantom Shares Taxation | Stock Options Taxation |
|---|---|---|
| US | Ordinary income on payout | Income tax on exercise (NSO) or capital gains (ISO) |
| Canada | Income on payout | Capital gains at sale |
| UK | Income on payout | Capital gains (EMI) |
| Spain | Income on payout | Income/capital gains depending on structure |
| Germany | Income on payout | Income/capital gains depending on structure |
⚠️ Always consult a tax advisor in your jurisdiction — rules change frequently and vary by company stage.
7. Best Practices for Managing Equity Plans
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Define clear vesting schedules (e.g., 4 years with 1-year cliff).
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Communicate transparently with employees — explain how value builds over time.
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Keep records digital — use a platform like Capboard.io to automate tracking, vesting, and reporting.
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Plan for exits early — decide how phantom shares or unexercised options are handled.
8. Real Example: A European SaaS Startup
A Madrid-based SaaS startup with 20 employees wanted to incentivize early hires before raising its Series A.
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They launched a phantom share plan through Capboard, linking payouts to company valuation milestones.
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After raising their round, they converted the plan into a real ESOP, seamlessly tracked in the same Capboard account.
✅ Result: zero legal headaches, clear visibility for investors, and employees who understood their upside.
9. Choosing the Right Plan for Your Startup
If your company is pre-Series A, phantom shares often make more sense.
If you’re scaling internationally or plan to raise VC funding, stock options may offer more long-term value.
Either way, clarity, transparency, and proper tracking are what matter most.
🧩 How Capboard Helps
Capboard lets startups across the US, UK, Canada, and Europe:
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Design both phantom share plans and stock option plans.
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Automatically calculate vesting and payouts in real time.
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Give employees clear dashboards showing their ownership value.
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Export data for investors or auditors in seconds.
📚 FAQs
Are phantom shares taxed like salary?
Yes — in most countries, payouts are treated as income when paid.
Can startups combine phantom shares and stock options?
Absolutely. Many use phantom shares early and switch to real ESOPs later.
Do phantom shares dilute investors?
No. Since they’re cash-based, they don’t affect the cap table until conversion or payout.
🚀 In summary
Both phantom shares and stock options can be powerful tools for motivating and retaining talent.
The best plan depends on your company’s stage, country, and goals — but whichever you choose, Capboard makes it easy to manage transparently and at scale.