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Lesson 12. Options and the Private Company > The 30-Second Recap - Pg. 58

Options and the Private Company 58 · The company can provide additional compensation to key employees without diluting ownership of the corporation. · The company can tie them to specific departments or divisions so the responsible employee earns the incentive directly. · The company wants to retain a key employee without actually granting voting stock. · The company wants to attract key management or technical people in a competitive market. · Since they are primarily a means of compensating employees and do not represent any real ownership, many of the securities laws associated with stock ownership are moot. · Companies have greater flexibility to structure them in a meaningful way. · There are no tax consequences until they are actually paid. · The company can attach vesting and other restrictions. Even though SARs and phantom stock reward employees for the performance of the company, they are still not the same as ownership. There is something important about "owning" a piece of the business that SARs and phantom stock can't duplicate. Tip Ownership is part of the American dream. SARs and phantom stock fall short of the dream. Private companies may still need a professional evaluation of their stock's value for purposes of SARs and phantom stock. Although companies can offer SARs and phantom stock to a broad base of employees, they run the danger of creating a qualified retirement plan. For this reason, most companies restrict SARs and phantom stock to key employees. The 30-Second Recap · Private companies can offer employee stock options the same as publicly traded companies. · Private companies often find it difficult to place a value on their stock and options. · Owners of private companies are often reluctant to dilute the ownership by granting stock to outsiders. · SARs and phantom stock are ways a private company can reward key employees without ac- tually giving up shares.