Modeling/Research Question

I am working with a middle market construction company that wants to examine various equity alternatives that could be used as a retention tool for 5-7 key employees. The company is currently held by two individuals who are looking to exit the business in five years. They are hoping to transfer limited ownership over the next five years and after five years either: 1. Continue with the management buyout (which would likely require the backing of private equity) 2. Seek an external buyer Once I have researched all of the alternatives I need to model what ownership transfer would look like with the vehicles selected (e.g. phantom stock versus stock options). Has anyone worked on a scenario like this? Where should I begin my research? What should this model look like (my audience is the company’s CFO)? Most of my work involves strategy consulting and I have not been tasked with modeling equity transfer structures (seems like more of a banker’s function). They have been through a formal valuation so I will use this as an input variable. It really comes down to how the company’s value is sliced and distributed and what the tax consequences are of various strucutures. I have an in-house tax expert so I will not have to research the tax implications in depth… Your input is appreciated!

What is the purpose of this modeling such as evaluating the best option for the management employees, or best option for the owner/LBO buyer or tax purpose? If I am correct, phantom stockowners won’t get the premium paid on LBO (since it is not an actual equity). Employees get a value equal to equity value multiplied by some pre-determined ratio. Tax is at ordinary rate. Suppose your employer promises to pay phantom stock after 5 years. In that case, you might need to consider only the value (without premium) in your transaction value (assuming LBO in year 5). Employee stock option (assuming you did not mean ESOP) - depends on the equity + premium paid by the LBO people. Just convert into equity if the offer price (equity + premium) is above the option price. Deduct option proceed from transaction value. Probably employees would be better off with options in case of LBO. Any comments……

I’ve never heard of phantom stock. What is it?

It’s a motivational compensation system. Employer agrees to pay management level employees amount equal to stock value/price multiplied by a predetermined ratio. It’s not an equity stake but just an amount. Basically employees get a piece of the pie but not any equity rights.

phantom stock, as i understand it, and very simply is when people short a stock without borrowing it from somebody else (naked shorting) in effect it creates the impression that there are more shares outstanding than there actually are