13 Mar 2020

Companies seeking to incentivise (or compensate) employees are faced with a multitude of options. When structured properly, employee stock option plans can lead to alignment of interests, continuity of workforce, and a heightened sense of synergy, giving a much welcome boost to efficiency, profitability, and valuations.

Due to their inherently unique features, phantom shares have seen a recent resurgence in popularity. However, in the context of Singapore, they come with their own unique set of implications, and therefore demand careful thought and foresight about the particular circumstances of each company.

This article will explore some pitfalls of phantom shares and seek to demonstrate alternative, yet feasible, solutions for Singapore start-ups seeking to launch Employee Stock Ownership Plans.

How do Phantom Shares Work?

In broad terms, phantom share plans usually feature the grant of a cash award that is paid out to employees upon the occurrence of a certain stipulated trigger event, such as a public listing, or trade sale. The structure may be attractive to business owners as no actual equity is awarded, and hence, there are no issues relating to dilution of ownership, dividend, and voting rights. Such plans are also relatively easy to administer as no issuance or transfer of shares are involved, benefits may be revoked easily, and cap tables remain undisturbed. From the employee’s perspective, it provides a convenient, cashless, and low-risk method for them to benefit from the future growth of the company.

General Pitfalls of Phantom Shares

Phantom Shares also come with a set of drawbacks, which may be adverse to the interests of the company and its founders. For instance, since phantom shares are usually structured to mature upon the achievement of certain liquidity milestones, they are likely to be recorded as contingent liabilities until such date. Correspondingly, the net valuation of the company (both present and future) must take into account the settlement of such debts. For potential investors, the relative uncertainty surrounding when these long-term liabilities might materialise, and how much they may eventually amount to confounds the valuation problem even further. When assessed against aspiring start-ups with high burn rates, uncertain exits, and unstable streams of income, this may become a bugbear during negotiations or even lead to a deal-breaking scenario. Likewise, phantom shares may not adequately instil a true sense of ownership in key executives as they will not own any actual equity or voting power in the company, and may be terminated due to external factors beyond their control, with nothing left to show for it.

Shares vs Phantom Shares: Assessing the Implications for Start-ups in Singapore

Central Providence Fund Implications

Pay-outs receivable on maturity of phantom shares are likely to be treated as “Additional Wages” for the purpose of calculating Central Providence Fund (“CPF”) contributions. This means that both the employee and the company will have to make contributions to the employee’s CPF account (as applicable).

In comparison, CPF will not be payable for the grant of share options (whether preference or ordinary shares), the exercise of the option to redeem the shares, and the selling of shares held in the name of the employee.

Tax Implications for Employees

Under the Singapore Income Tax Act 2014 (Cap. 134) (the “Income Tax Act”), both phantom share benefits and share options will likely be considered a ‘gain or profit from employment’, and hence personal income tax may be payable on them.

However, the tax scheme in Singapore may favour the grant of actual shares over phantom shares. Taxation on any grant of shares will usually accrue on the date of vesting or exercise (as applicable), and the amount taxable will be the open market price of the shares at that time, less any amount paid for the shares. For early stage start-ups, this would typically occur alongside the vesting and exercise schedule as the valuation timeline of the company progresses. Thus, the taxable amount is in the hands of the employees is likely to be lower in the case of the grant of actual shares when compared against phantom shares, which are generally pegged to liquidation events.

Additionally, employees who have exercised options for actual shares may qualify for the Qualified Employee Equity-based Remuneration Scheme. Subject to qualifying criteria, the payment of tax arising from stock option gains can be deferred for up to 5 years with interest charge. Employees who have been awarded phantom shares are excluded from the participation in this scheme.

Priority of Repayment

In the event there is any liquidation or winding up of the company after phantom shares payment rights have crystallized, then the priority of claims for recipients of phantom shares might also rank higher than that of any other class of shareholder. This may be seen as unwelcome for investors seeking to enforce their liquidation preference rights.

Finding a Flexible Solution within Singapore

Singapore companies are permitted to allot and issue multiple highly customizable classes of shares which can be tailored to meet the specific needs of the company with each round of issuance.

The key features of phantom shares can quite readily be subsumed into the creation of a special class of preference shares meant for employees – while allowing the company to contract itself out of the associated drawbacks of phantom shares.


In the context of Singapore start-ups, phantom shares may introduce a raft of unwelcome complications and uncertainties for the company, employees and investors. By comparison, preference shares present an almost empty canvass upon which founders may comprehensively and flexibly draft out the various rights and exit plans attaching to their ESOP scheme. Therefore (and especially more so for early to mid-stage start-ups), preference shares may be able to provide a more viable solution to avoid many of the common pitfalls associated with phantom shares.

In any event, it is important to consult a lawyer and tax advisor to assist you in deciding on and implementing the appropriate ESOP structure for your company.

Disclaimers: The purpose of this article is only meant to provide a broad overview of some possible considerations and structuring options for Singapore companies looking to implement an ESOP. It is strongly recommended that a professional legal and tax advisor should be engaged to assess any details specific to your circumstances.