What is phantom share vesting? Practical guide for startups

When you build a startup from scratch, giving away equity is not just a legal issue: it's a strategic decision. How do you engage key talent without diluting yourself from day one? How do you attract and retain people who believe with you, without giving away shares too early?
At Tetuan Valley, we have seen it all. And that's why today we want to explain one of the most used (and least understood) mechanisms: phantom share vesting.

What are phantom shares?

Phantom shares are a type of incentive that simulates the ownership of shares, but without actually granting them. In other words: they do not involve changing the cap table, but do allow the beneficiary to receive a payment linked to the value of the company (e.g. after a sale or round).

What advantages do they have over traditional equity?

• You do not alter the distribution of capital.

• You do not need a notary or capital increases.

• You can link it to specific objectives.

• They are ideal for pre-Seed phases or when there is uncertainty about the duration of the bond.

This makes many startups prefer phantom shares to sign technical talent, advisors, early employees or late-stage co-founders, without the hassle of corporate contracts.

What is vesting and why does it matter?

Vesting is the calendar that defines when someone actually earns the right to their participation (real or fictitious). It is key to avoid situations such as someone leaving the team after a few months and taking benefits without having contributed in the long term.

Typical Vesting: 4 years with 1 year of cliff

The most commonly used model is:

• 1-year cliff: if the person leaves before, he/she gets nothing.

• As of month 13: 25% is released.

• The remainder is delivered on a month-to-month basis until the 48th month.

You can also do vesting by milestones (e.g. MVP delivery, customer acquisition, etc.) or adjust the schedule to your case.

When to use phantom shares with vesting in your startup?

Since Tetuan Valley, we have seen dozens of startups that have successfully used this system. Here are some real cases (anonymous) to give you an idea:

🚀 Case 1: signing a CTO without diluting real equity

An idea stage startup needed a strong technical profile. They offered 1% in phantom shares with 4-year vesting / 1-year cliff, which would be converted into an economic payment in case of a round, sale or dividend distribution. This way they ensured commitment, without changing their cap table.

🌱 Case 2: retaining a key designer with incentives.

After launching their MVP, the founders wanted to keep the designer who had been instrumental in validating the product motivated. They offered her 0.5% in phantom shares with 3-year vesting tied to design milestones. After two years, with a round already closed, she received her first payout.

🧠 Case 3: rewarding a strategic advisor

An advisor who helped with strategy and connections received phantom shares equivalent to 0.3% of the valuation, with quarterly vesting for 1 year. It was an agile and fair way to recognize his contribution without entering equity.

What to consider when implementing phantom shares?

• Write it well: it is key to have a clear contract (even if it is private). You can help yourself with tools such as Capboard or SeedLegals.

• Define liquidity events: When is it paid? What triggers it?

• Be transparent from the beginning: whoever receives it should understand exactly what it means and what it doesn't mean.

Is it for all startups?

Not always. If you already have an advanced round or a complex corporate structure, other forms of participation (such as real equity or stock option plans) may be more appropriate. But if you are in the seed stage, validating your model and assembling a team, it is probably one of the best ways to motivate without ceding control.

Are you at that key moment of team building?

From Tetuan Valleywe have been accompanying startups in their early stages for more than 15 years. We know that these types of decisions are not easy, but we also know that they make the difference between growing with vision or improvising.

If you are exploring how to incentivize your team without giving up real equity, or want to design a phantom shares plan with vesting, we can help. 👉 Write to us o apply for one of our programs and become part of our community of purpose-driven founders!