Part 1: Breaking Down Different Creator Equity Structures

Hi All,

Happy 2025! In a previous newsletter we provided a general overview of Creator Stock Option Pools (CSOPs) and a few examples of companies using them to align long-term incentives with creators. In today’s piece we are going to get into the weeds of stock options and other common equity-type structures. We tried to keep our breakdown less technical and easier to understand. We do provide links to videos at the bottom of each section with more technical explanations if you want to go down the rabbit hole for each structure.

This is the first installment of our three-part series on equity structures for creators:

• Part 1: An overview of the advantages and disadvantages of each compensation structure.

• Part 2: Insights on which structures are more appealing from a startup/ company perspective when working with creators.

• Part 3: Specific structures that are more appealing for creators, along with our recommendations.

Let’s get to it..

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Introduction 👋 

You've been considering a creator equity deal for a while to help grow your brand and have finally found creators aligned with your company's mission. After agreeing on the equity amount and deliverables, you might think it's time for the fun part. Unfortunately, not so fast – there's one more step before paying lawyers a fortune (not for long, but that’s for another time 😉).

As a company, you must choose the type of stock-based compensation to issue. Each has its own pros and cons for both the startup and the creator. Many startups overlook this decision, which can result in being blocked by investors from issuing equity or having unhappy creators if the structure is not favorable for them. Remember, most creators and their agents lack experience in equity deals. Clear communication and aligned expectations from the start are key to establishing the right level of trust in the partnership.

Today, we'll cover four common equity compensation structures and go over the general pros and cons. These structures are widely used in the business world, so there's plenty of precedent and information online to learn more. We will say that for creator equity deals, there are unique considerations both companies and talent should consider. These nuances will not be shared in today’s piece. We will cover them in the next two newsletters.

Here are TL;DR descriptions for each structure. You can click on the links below to jump to the different sections for ease of reading.

Quick disclaimer - this is not legal advice. You should consult with a lawyer or tax advisor that has experience with stock-based compensation to determine what instrument is best for your situation. The goal for this newsletter is to serve as a starting point so you can narrow on the equity structure that makes sense for you.

1️⃣ Restricted Stock Units (RSUs)

Restricted Stock Units (RSUs) are when a company promises to give creators stock as a reward, but only after the creator works there for a certain time or meets certain goals. Once a creator earns them by sticking with the company or hitting targets, the RSUs turn into real shares that a creator can keep or sell.

Advantages of RSUs

• Easy to understand: Creators and companies don’t have to navigate complicated rules and calculations—once a company issues shares they belong to the creators.

• No cost for shares: Creators don’t have to pay any money to purchase shares.

• No upfront dilution for existing owners: RSUs do not dilute shareholders until the shares are earned by the creator.

Disadvantages of RSUs

• No immediate ownership: Creators do not receive RSUs right away; they often need to work at the company for a specific period of time or meet certain goals before they get them.

• Dilution for existing owners once shares are earned: existing owners of the company will own less of the company once a creator earns the shares.

• Higher taxes: When a creator receives the shares, they may owe taxes on their value even if the creator does not sell them. RSUs often carry higher tax rates than other compensation structures.

Watch this video for a much more detailed explanation of RSUs

2️⃣ Stock Options

Stock options are like coupons that let creators buy a company’s shares at a fixed price (strike price) for a certain amount of time. If the company becomes more valuable and the share price goes up, creators can use the, “coupon” to get the shares at a discount and make money. But if the price goes down or it’s hard to sell the shares, the creator might not benefit.

Advantages of Stock Options 👍️ 

• Low initial cost: Stock Options require very little upfront capital from the creator vs immediately buying shares in the company at their current value.

• No dilution for existing owners: Companies often set up stock option plans before talking with creators so the current ownership does not face dilution.

• Limited downside risk: The most a creator can lose is the cost of the option (if any), without committing full capital to own shares outright.

Disadvantages of Stock Options 👎️ 

• Creators must pay for shares: stock options require a creator to pay for company shares at a set price. They are not granted for free like with other structures.

• Creator faces dilution: if a company raises additional capital after the options are granted it will reduce the value of options the creator receives.

• More complicated taxes: taxes on stock options can be good or bad for both parties depending on how they are structured. They often require expert tax advice in order to structure them properly for both the company and creator.

Watch this video for a much more detailed explanation of stock options

3️⃣ Warrants

Warrants give the creator the right to buy shares of a company at a set price (called the exercise price) before a certain date. It’s similar to a coupon that gives you a good deal on buying something. Companies often give out these “warrants” to encourage creators to put upfront work in and invest their time in the company. Unlike regular coupons, warrants usually last a very long time, giving you plenty of opportunity for creators to use them.

Advantages of Warrants 👍️ 

• Lower initial cost: warrants can be priced very cheaply so creators get the right to buy stock at a nominal cost.

• Longer expiration: Warrants usually last a long time, giving creators more flexibiliy on when to purchase the shares.

• Customizable terms: Since a company issues warrants directly, they can set the terms alongside the creator to create a win-win.

Disadvantages of Warrants 👎️ 

• Must pay for shares: warrants require a creator to pay for company shares at a set price. This is very different from receiving stock for free or sharing in the profits.

• Dilution for existing owners: If creators use their warrants to buy stock, this means existing owners will own less of the company.

• More complex taxes: Taxes on warrants can be a bit tricky for both parties. In most cases, creators don’t usually pay taxes when they receive the warrant itself. But, when the creator uses or exercises the warrant to buy shares, or later sell those shares for more than they paid, that’s when taxes often come into play. The exact rules can vary, so it’s wise to check with a tax professional or look up local regulations.

Watch this video for a much more detailed explanation of warrants

4️⃣ Phantom Equity

Phantom equity is like having a pretend share in a company. The creator doesn’t actually own any stock, but if the company makes money or becomes more valuable, the creator gets a piece of that success. It’s a way for a company to reward creators without giving away real shares. This means creators can enjoy profits or bonuses without having the same responsibilities as an actual stockholder.

Advantages of Phantom Equity 👍️ 

• No dilution for existing owners: Since companies do not actually give away stock, the company’s existing owners don’t lose any ownership percentage.

• Highly customizable: Companies can design the phantom equity plan to fit whatever goals they and the creator have, so it’s more flexible than other structures.

• Company ownership not affected: Creators are technically not owners of stock so they don’t have voting rights or extra responsibilities—just the chance to earn money if the company grows.

Disadvantages of Phantom Equity 👎️ 

• No actual ownership for creators: Creators may perceive phantom equity worse vs actual equity as they don’t gain voting rights. This can potentially reduce engagement.

• Can become tricky and expensive to manage: Setting up and keeping track of phantom equity can involve a lot of paperwork and rules if not set up in a simple, straightforward way. It can get messy if a company raises additional funding.

Watch this video for a much more detailed explanation of phantom equity

Conclusion 👋 

We hope this breakdown was helpful as you explore equity deals with creators. Below is a side-by-side comparison of key features for each structure.

COMPARING KEY FEATURES OF CREATOR EQUITY COMPENSATION STRUCTURES

In our next newsletter (Part 2 of the series), we will share our insights on which structures are more appealing from a startup/ company perspective when working with creators on an equity deal.

Have a great day and remember to Go Direct!

Jordan & Scott

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