Part 2: Creator Equity From A Company Perspective

Hi All,

In Part 1, we covered the basics of four common equity structures—RSUs, Stock Options, Warrants, and Phantom Equity—along with their general pros and cons.

Today, we’re shifting gears to examine these structures from the company’s perspective. As a startup or growing business, your goal isn’t just to incentivize creators—it’s also to protect your long-term interests. This newsletter will help you understand how different equity structures impact ownership, cash flow, administration, and strategic alignment.

We’ll also explore the unique challenges of working with creators and why we believe phantom equity is the most compelling option for the vast majority of creator partnerships.

Let’s goooo….

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Quick Recap of Equity Structures  

Here are the TL;DR summaries of each equity compensation structure as a quick refresher.

Here’s a link if you want to read the full piece - Part 1: Breaking Down Different Creator Equity Structures.

Making the Decision

Companies should consider the following main items when evaluating different equity compensation structures with creators:

• Your Growth Stage: Early-stage companies may prioritize cash flow and administrative simplicity, while later-stage firms might tolerate more complex structures for greater alignment with long-term goals.

• Investor Expectations: Ensure your equity decisions are in line with investor requirements to avoid roadblocks in future fundraising rounds.

• Long-Term Strategy: Choose a structure that not only attracts top creative talent but also reinforces your company’s vision and aligns with your core values.

We typically categorize companies in two buckets: 1. Startup/early-stage and 2. Later-stage to help identify the most suitable equity compensation structures when issuing stock to early or key employees.

For early-stage companies, stock options are a popular choice for key employees, while RSUs are more common in later-stage companies. Below is a breakdown of recommended structures based on company stage.

For a deeper analysis, we’ve developed a scoring system to illustrate how each equity structure impacts key factors companies should consider when evaluating compensation options. Green represents the most attractive options, while red indicates the least attractive—just like a traffic light ☺️ .

Our Recommendation for Creators - Phantom Equity

Based on our experience looking at creator equity deals, phantom equity is the dark horse of equity compensation. It’s often overlooked and misunderstood (partly because of its terrible name), yet uniquely suited to solving key challenges in the creator economy. Why? Working with and incentivizing creators is a very different animal than compensating early or key employees. While stock options and RSUs dominate equity discussions in the startup and business worlds, phantom equity is rarely mentioned. We believe phantom equity offers unmatched flexibility and addresses the nuances of working with creators better than more commonly used structures. Below we break down why creators are different and how phantom equity can help address the unique challenges companies face when working with creatives.

1️⃣ Creators are entrepreneurs, not employees

Challenge: Creators are a different breed. Unlike early or key employees, creators aren’t singularly focused on your company. They are running their own businesses, juggling content creation, audience growth, and monetization. Their work is all-encompassing, demanding immense creativity and a constant dedication to honing their craft—especially in today’s hyper competitive, content-saturated creator economy. Creators wear multiple hats and won’t be predominantly focused on driving value for your company. Because of this, you must design and structure these relationships that accommodate the realities of a creator’s daily life and priorities.

How Phantom Equity Helps?

• Doesn’t force creators into a rigid, employee-like structure.

• Can be structured as a profit-sharing model, ensuring creators are rewarded based on the value they contribute as well as on a company sale without long-term employment commitments.

• Allows for customized terms that align with the creator’s level of involvement rather vs standard vesting schedule.

2️⃣ Creators prioritize their own brands

Challenge: A creator’s primary goal is to build their own platform and audience, not just drive value for your company. Traditional equity structures often don’t align with this reality as it doesn’t allow the creator to prioritize building their brand first.

How Phantom Equity Helps?

• Provides creators with financial upside without constraints of ownership. This allows creators to stay focused on their brand while benefiting from the company’s success.

• Can be linked to specific performance milestones tracked back to the creator. This ensures alignment between the creator’s work and your company’s growth.

• Avoids conflicts of interest by allowing creators to work with multiple brands while still having an incentive to support yours.

3️⃣ Most creators need immediate cash flow

Challenge: Most creators rely on brand deals and advertising revenue to sustain their business. Unlike employees who get paid a salary and can wait for equity to vest, very few creators have the opportunity to dedicate a large portion of their time to your company without cash flow coming in for an extended period of time.

How Phantom Equity Helps?

• Can be structured with periodic profit-sharing payouts rather than a long-term vesting schedule, providing creators with near-term financial incentives.

• Eliminates the need for creators to buy shares or pay exercise prices, which can be prohibitive for those without disposable income.

• Can reduce the financial risk for a creator as they don’t need to wait for an exit event to see value.

4️⃣ Creators may not understand complex equity terms

Challenge: Most creators (and even their managers) aren’t familiar with traditional equity concepts like stock options, exercise prices, and tax implications.

How Phantom Equity Helps?

• Can be structured in clear, simple terms, avoiding legal and financial jargon that might deter creators (in fairness, it can also get complicated).

• Does not require understanding of stock option mechanics, making it more approachable.

• Can offer a predictable payout structure rather than forcing creators to navigate complicated equity liquidity events.

5️⃣ Existing investors may be skeptical of issuing equity to creators

Challenge: Many investors are wary of giving equity to creators upfront without a prior working relationship or proof that they can create value.

How Phantom Equity Helps?

• Can allow companies to test the relationship before committing to formal equity, reducing risk for both parties.

• Can include conversion triggers, meaning it can transition into real equity only if predefined milestones are met.

It can keep current investors from being diluted until creators prove they can create value, which makes it more palatable for investors.

To sum it up - phantom equity is uniquely suited to the creator economy. It offers performance-based cash flow, simplicity, and flexibility—all while ensuring long-term alignment between the creator and the company.

Importance of Dating Before Getting Married

The fact that individuals and small teams have unprecedented distribution and deeply engaged communities through digital content creation has never existed before. This emerging creator-entrepreneur class is completely new and they are now looking for ways to expand beyond content. However, given the unique dynamics of how creators work, companies should take a phased approach before committing to an equity-based relationship and the reason why we really like phantom equity.

From our experience, phantom equity can be the most effective tool for navigating this space and unlocking value. But, the biggest challenge (aside from its unappealing name) is that creators may perceive it as less attractive than actual stock. However, there are two key points that address this concern:

1. It Can Function Like Equity: When structured properly, phantom equity can mirror actual stock ownership in terms of financial benefits.

2. It Can Convert to Formal Equity: Phantom awards can be designed to convert into real shares once specific performance goals are met, granting full ownership and voting rights.

Final Message for Companies

Creators—and their agents—often lack company-building experience navigating investor dynamics. Many don’t realize that equity isn’t something companies “hand out.” Educating them on the importance of earning and structuring equity thoughtfully is crucial as creator equity deals become more common. However, this conversation must be fair and considerate, recognizing the unique realities creators face and the many other opportunities available to them.

In our next newsletter (Part 3), we’ll explore which equity structures are most attractive from a creator’s perspective. We’ll also highlight key considerations for creators and their management to better understand the company’s perspective when negotiating these deals.

As always, we recommend consulting a tax or legal advisor (or just ask ChatGPT to start) before deciding on the best equity compensation structure to look at.

Have a great day and remember to Go Direct!

Jordan & Scott

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