Equity compensation is a well known tool for rewarding and incentivizing teams. But it is not for everyone.

Many founders are either unable or unwilling to share ownership of their company but still want to offer their team upside potential in the business.

In this scenario, it’s often possible to create a deferred compensation program that mirrors some of the economic benefits of ownership without actually issuing shares.

Examples:

Transaction Bonus Plans. Companies can grant service providers rights to a share in the proceeds of a liquidity event, such as a Company sale.

Profit Sharing Plans. Companies can grant service providers rights to share in the Company’s annual profits.

Phantom Stock Plans. Companies can grant service providers “phantom stock” which appreciates in value alongside actual stock and can be liquidated in connection with certain future events, such as retirement or a change of control.

As with stock grants, participation in these programs can be made subject to vesting, the achievement of milestones, or other requirements.

These programs have drawbacks and aren't perfect. Payments are generally taxed as ordinary income rather than capital gains. And they must be structured carefully to comply with stringent tax requirements, including IRC 409a.

Nevertheless, they are valuable and useful tools for founders seeking to reward and incentive long-term team members while retaining full ownership and control of their companies.