Introduction
Welcome to our guide on calculating the value of a participant's portfolio in a phantom plan within the Eldison platform. This article explains the formula and process used to determine the bonus amount for eligible participants upon an Exit Event, with a simplified example for clarity.
Calculation from the Plan Terms
The bonus amount upon an Exit Event is calculated using the following formula:
Where:
Bonus: The monetary or in-kind amount the company pays to the eligible participant, subject to tax and other deductions.
F: The total consideration shareholders would have received for their shares dedicated to the plan during the Exit Event.
VPS: The total number of the participant’s vested phantom shares at the time of the Exit Event.
TPS: The total number of phantom shares in the plan at the time of the Exit Event.
IV: The initial value of all the participant’s vested phantom shares before the Exit Event.
Initial Value (IV)
Definition: The initial value (IV) represents the starting value of a participant’s vested phantom shares at the time they are granted. This is an important metric as it serves as the baseline for calculating the appreciation of the shares over time.
Purpose:
Baseline for Growth: The initial value helps in measuring the growth in value of the phantom shares, which is crucial for calculating the bonus upon an Exit Event.
Fair Comparison: It ensures a fair comparison between the initial grant value and the current value, allowing for an accurate assessment of the participant's earned bonus.
Motivation: By knowing the initial value, participants can see the growth of their shares, which can serve as a motivation tool.
Example Calculation
Scenario: Participant John Doe
F: $50,000,000 (company value) * 8% (pool size) = $4,000,000.
VPS: 20,000 vested shares.
TPS: 1,000,000 total shares.
IV: 20,000 * $1.10 = $22,000.
Plugging these values into the formula:
Bonus = 4,000,000 × (20,000 / 1,000,000) − 22,000
Bonus = 80,000 − 22,000 = 58,000
John Doe's bonus is $58,000. The formula essentially calculates the difference between the current value of vested shares and their initial value.
Conclusion
Understanding this calculation is key for transparent and effective ESOP management. For more information or specific inquiries, please refer to Eldison Support.