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 (Fund): The total consideration shareholders would have received for their shares dedicated to the plan during the Exit Event.
VPS (Vested Phantom Shares): The total number of the participant’s vested phantom shares at the time of the Exit Event.
TPS (Total Phantom Shares): The total number of phantom shares in the plan at the time of the Exit Event.
IV (Initial Value): 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 (Fund): $50,000,000 (company value) * 8% (pool size) = $4,000,000.
VPS (Vested Phantom Shares): 20,000 shares.
TPS (Total Phantom Shares): 1,000,000 shares.
IV (Initial Value): 20,000 shares * $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.
Interpreting the Results
Before the Cliff Ends: If John is still in the cliff period and has 0 vested shares (VPS = 0), his bonus is calculated as 0 × (any value) − Initial Value = 0. This is why the portfolio value shows as $0 during this time.
After the Cliff: Once shares vest, the value starts to rise, as seen in the calculation above.
Valuation Scenarios: If John’s Initial Value of $1.10 per share is higher than some company valuation scenarios, his portfolio value might initially seem low, but it will grow as the company valuation increases.
How the Graph Works
To help you visualize portfolio growth, the Eldison platform provides a graph based on this straightforward formula:
PortfolioValue = Number of Vested Shares × (Asset Value under Valuation Scenario−Initial Value)
The graph does not include unvested shares - only vested assets are reflected.
It shows growth over time as shares vest and the company valuation increases beyond the Initial Value.
If the valuation scenario remains lower than the Initial Value, the portfolio value will appear low or even remain at $0 in those scenarios.
Understanding the Basics: Why Your Portfolio Value Might Be 0
Cliff Periods and Vesting
In phantom plans, shares typically follow a vesting schedule, which often includes a cliff period—a set period during which no shares are vested.
If You’re in the Cliff Period: Since you don’t have any vested shares yet, your VPS (Vested Phantom Shares) is 0. And as the formula shows, multiplying 0 by any value always results in 0, meaning your portfolio value is 0 during the cliff period.
Once the Cliff Ends: As shares begin to vest, your VPS increases, and you’ll start to see the portfolio value grow under different valuation scenarios.
Initial Value and Low Early Portfolio Values
The Initial Value (IV) - the baseline value of your phantom shares at the time they are granted - can also influence the perceived growth in your portfolio value.
If your Initial Value is relatively high compared to the company’s valuation scenarios, your bonus calculation might appear lower in the beginning. This happens because the formula rewards the growth above the Initial Value.
As the company’s valuation increases over time, the asset value (valuation minus the Initial Value) rises, which is reflected in your portfolio growth.
Conclusion
Understanding this calculation is key for transparent and effective ESOP management. For more information or specific inquiries, please refer to Eldison Support.