Article explains about Phantom Stock/ Shadow stock, Share warrants/ Advisor Warrants and Non-Qualified Stock Option. It explains Basis, Meaning, Cost, Tax Treatment, Efficiency, Benefits, Disadvantages and Pricing of Phantom Stock/ Shadow stock, Share warrants/ Advisor Warrants and Non-Qualified Stock Option.
| Basis | Phantom Stock/ Shadow stock |
Share warrants/ Advisor Warrants |
Non-Qualified Stock Option |
| Meaning |
In Phantom stocks rather than getting physical stock, the employee receives mock stock. Through which Companies share a portion of their profits or appreciated valuation. |
Advisor Warrants means, at any time, warrants to acquire Common Shares |
NSOs can be awarded to both employees and independent contractors. This can be an attractive feature for cash-sensitive start-ups that need to pay advisors and consultants. |
| Cost | It is the most cost-effective way for deferred payment of cash compensation to employees |
warrants offer a viable option for private investors because the cost of ownership is usually low and the initial investment needed to command a large amount of equity is relatively small. |
it reduces the potential cash outflow and allows the company to retain higher cash and liquidity for other needs. |
| Tax |
Cash entitlement at the time of the exercise of Phantom Stock Options is taxed under the head of salary income as perquisites in the hands of the employee. The company is required to withhold taxes (read tax deducted at source) just before making payment of the cash entitlement to the employees. |
Exercising stock warrants results in taxable income that amounts to the difference between the strike price and the price of a share, minus the cost basis. |
NSOs are taxed once they are exercised. the bargain element of the shares is taxed as compensation income to the recipient and is deductible by the employer. Taxable Amount = No. of Shares Exercised * (Market Value at Exercise – Grant Price) |
| Efficiency | The existing Indian legal framework is silent on the grant and exercise of Phantom Stock Options, companies will have the liberty of formulating schemes for the grant and exercise of the Phantom Stock Options in a manner as they may deem fit. |
Stock warrants are issued by the company itself. The stock warrant is good up until its expiration date. After the expiration date, the warranty has expired, and the holder can no longer use it. |
Non-qualified stock options (NSOs) are available to regular employees, individual/external contractors, directors, vendors, and other parties. Non-qualified stock options result in additional taxable income to the recipient at the time that they are exercised, the amount being the difference between the exercise price and the market value on that date |
| Benefits |
incentivizing and retaining employees. Can be issued to employee/ non-employee Does not result in a dilution of the shareholding of such companies. |
to raise capital. as employee benefits, recruitment, or retention package. Stock warrants are also more flexible in their terms Can be issued to anyone |
It also acts as an incentive for employees – once they have a vested interest in the company, they are likely to be loyal and motivated to increase the value of the stock. Non-qualified stock options (NSOs) allow employees to buy a company’s shares at a present price. they can be granted to non-employees there is no limit on the term of the options |
| Disadvantages | they may not be an attractive option for employees who may be seeking an equity stake in the company in the form of Stock Plans |
Upfront payment needs to be paid. a warrant does not mean the actual ownership of the stocks but rather the right to purchase the company shares at a particular price in the future. |
the employee is taxed (at ordinary income rates) on inherent gain upon exercise of the option. |
| Pricing |
They must have an FMV as determined by Registered Valuer in case of Unlisted Company. Market Price in the case of Listed Company. |
Pricing of the warrants can be done by using the following Option pricing models.
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