What is a shadow stock?
A shadow stock, or phantom stock, is a synthetic equity used by U.S. companies as an employee benefit. It grants the employee a right to receive compensation based on the value of the company’s listed stock. If the firm’s shares aren’t listed, the benefit plan specifies how the shadow stock is valued.
Where have you heard about a shadow stock?
As a private investor, you can’t invest in shadow stocks. You’ll probably only have heard of them if you or someone you know works for a firm that offers this type of employee benefit. This type of synthetic equity compensation award is generally issued as stock appreciation rights.
What you need to know about a shadow stock.
If you’re offered shadow stocks as an employee benefit, you’ll be offered the right to the cash equivalent of an increase in a specific number of shares over a given period. You should be able to exercise this right any time after your shadow stocks vest. It’s important to read the small print because you’ll want to know where you stand regarding issues such as rights to interim distributions of earnings, restrictions on selling shares, liquidity concerns and vesting rules. You’ll be taxed at the ordinary income rate when you exercise your right to sell your shadow stock.