The owners of closely held businesses often want to reward key employees by making them shareholders.  This is an important way also to motivate those key employees to continue to do good work and add value to the business.

       However, California law - unlike the law of Delaware - provides strong protection to minority shareholders.  For that reason we strongly urge the owners to enter into individual employment agreement with each key employee and to include, as part of that agreement, a Phantom Stock Agreement.  That gives the employee virtually the same economic rights that the employee would have were that employee a shareholder.  Assume the decision is made to treat the key employee - Joe - as a 5% shareholder.  Each year Joe would receive, as a bonus, an amount equal to 5% of the profits of the business.  For that purpose the owner-employee would agree to restrict the owner's compensation to a specific number.  In the event of a sale, Joe would get 5% of the sales proceeds.  For the sale event, Joe might share in 5% - or just in 5% over the value of the business at the time that Joe becomes an owner of phantom stock.  And Joe's rights as a shareholder of phantom stock might vest of 5 or 10 years. 

       There are a variety of ways to customize phantom stock plans to make them truly attractive to key employees.  The key is that in the event of a dispute, the key employees' rights are limited to those found in the contract; the employee does not have access to the protections afforded to minority shareholder under the Corporations Code of the state of California..

       If you are interested in motivating a key employee, let's have that discussion.