In recent years, startups have boosted the Spanish business ecosystem, driving innovation, digitisation and job creation. They have also contributed to new corporate structuring models and incentives designed to attract talent and capital, aligning the Spanish market with practices more commonly used in other international environments.
Such practices include the use of Phantom Shares and Stock Options, i.e. two mechanisms that link a company’s interests with those of investors, strategic partners and key talent. So how do they work? What are their legal and commercial implications? What are their advantages and risks? This article analyses such concepts with a view to understanding their relevance in today’s business strategy and how they can contribute to a startup’s growth and sustainability.
1. Concept and legal nature
Phantom Shares are a compensation instrument that grants their beneficiaries economic rights comparable to those of ordinary shares, without involving the transfer of share ownership.
Stock Options are financial instruments that give certain beneficiaries, such as key employees, managers or directors, the right to buy shares in the company at a predetermined price and within a specified period.
There are key differences between Phantom Shares and Stock Options in their nature and effects within the company. Phantom Shares do not confer share ownership since they merely grant economic rights without representing an actual stake. Conversely, Stock Options may result in the actual acquisition of shares, giving their beneficiaries a stake in the company.
In terms of their corporate impact, Stock Options may dilute the stake of existing shareholders since exercising them implies the issuance of new shares and an increase in the number of shareholders. On the other hand, since Phantom Shares are strictly a contractual right without conversion into actual securities, they do not affect the company’s capital structure.
2. Regulation under Spanish commercial law
Despite their growing popularity in the business world, both Phantom Shares and Stock Options lack specific regulation under Spanish commercial law. Their implementation is governed by contractual freedom, which enables companies to design these mechanisms flexibly, but also requires rigorous planning to avoid legal and corporate conflicts.
Since Phantom Shares are not considered transferable securities nor shares, they fall outside the scope of the Spanish Corporate Enterprises Act (LSC). They are contractual agreements between the company and the beneficiary, whose proper documentation in corporate agreements and individual contracts is key to their legal certainty and effectiveness in future corporate transactions.
On the other hand, although Stock Options are not specifically regulated under Spanish company law either, they must be aligned with the general provisions of the LSC, especially regarding the issuance of new shares and the protection of the existing shareholders’ rights.
3. Strategic use at startups
Startups use such practices because they operate in highly dynamic environments, where raising capital, attracting talent and efficiently managing capital are critical to their success. In that context, Phantom Shares and Stock Options are strategic tools that enable startups to grow in a sustainable way without compromising their ownership structure and help them to achieve the following strategic objectives:
- Investment attraction: both concepts encourage investors to participate without the need to grant shares immediately. In that way, the stakeholders’ interests are aligned with those of the company by fostering their commitment to the project without directly affecting the ownership structure.
- Key talent retention: the success of a startup depends to a large extent on its team. Both Phantom Shares and Stock Options act as retention mechanisms by offering key employees the opportunity to benefit from the company’s financial growth without generating immediate costs to the company.
- Avoidance of equity dilution: Phantom Shares are especially useful for recognising the contribution of employees and collaborators without changing the ownership structure, enabling the founding partners to maintain their control over the company while continuing to incentivise their team.
- Investment round strategy: Stock Options can be strategically designed to facilitate future rounds of financing.
Conclusion
In an ecosystem where innovation and competitiveness make the difference, startups must adopt strategies that enable them to attract talent and investment without compromising their corporate stability. Phantom Shares and Stock Options not only serve this function; they also provide companies with the ability to structure incentives aligned with their long-term vision. Nevertheless, their proper implementation requires a robust contractual design that is aligned with the market regulations in force.
In that respect, specialised advice in corporate and commercial law is essential. A sound contractual design that is tailored to each company’s needs will ensure that such mechanisms serve their purpose without creating unnecessary risks. If you need advice, our team of professionals is at your disposal. Contact AGM Abogados.
Xiomara Jiménez Rodríguez
Legal Counsel
