October 14, 2026
Most startups only ever use two kinds of equity: restricted stock while the share price is nominal, then stock options. RSUs, stock appreciation rights and phantom stock are alternatives that suit later-stage or non-venture companies, and profits interests play the same role in an LLC. Because these tools are rarer and harder to design, work with counsel before adopting one.
Key takeaways
| Instrument | Who typically uses it | What the holder gets | 83(b) election? |
|---|---|---|---|
| RSUs | Later-stage companies with a high share value | Shares delivered once vesting conditions are met | No |
| Stock appreciation rights (SARs) | Later-stage or non-venture companies | The increase in share value, in cash or stock | No |
| Phantom stock | Profitable companies that don’t plan to sell equity | A cash payment tied to the value of a set number of shares | No |
| Profits interests | LLCs | A share of future growth in the LLC’s value | Often filed protectively |
Rarely, and usually for a specific reason. Phantom stock or SARs fit a profitable company that will never issue stock to employees, such as a closely held business or one that doesn’t plan to raise venture capital. RSUs fit a company whose share value is too high for options to be attractive, which usually means later rounds. Profits interests fit LLCs. Everyone else should start with restricted stock and move to options after the first 409A valuation. See Startup Equity Compensation for the standard setup.
Phantom stock is a promise to pay an employee cash equal to the value of a set number of “phantom” shares, usually on a sale of the company or another set date. The holder owns no shares and has no voting or other stockholder rights. At a private company there is no market price, so the plan has to define value, often by reference to the most recent 409A valuation or a formula.
Phantom stock is unusual before a company is profitable, because the company has to fund the payout in cash. The payouts are ordinary income to the employee, and phantom plans are generally deferred compensation, so they must be designed to comply with Section 409A. The plan should also say what happens on termination, since the company has wide discretion to set those terms.
A SAR gives the holder the increase in the company’s share value between the grant date and the exercise or payout date. SARs can be settled in cash or in stock. Because they only pay for growth, they work like a stock option without an exercise price, and they suit companies with a meaningful share value. For an early-stage startup, RSAs or options are almost always a better fit.
A restricted stock unit is a promise to deliver shares once vesting conditions are met. Nothing is issued until then, so there is no 83(b) election, and the shares are taxed as ordinary income when they are delivered. That is why private companies usually make RSUs double-trigger: they vest only on time served plus a liquidity event such as an acquisition or IPO, so employees aren’t taxed on stock they can’t sell. Unvested RSUs are simply forfeited when someone leaves; there is nothing to repurchase.
RSUs make sense once the share value is high enough that options would be expensive to exercise. See RSAs vs RSUs and Restricted Stock vs Stock Options.
An LLC has no stock, so it can’t grant restricted stock or options in the usual way. Instead it grants profits interests: a right to share in the future growth of the company’s value above a set threshold, measured when the interest is granted. Profits interests can vest like restricted stock, and recipients often file a protective 83(b) election. The tax treatment depends on how the grant is structured, so the recipient should talk to a tax advisor. If you expect to raise venture capital, converting to a Delaware C corporation is usually the cleaner path. See C Corp vs LLC.
All four can vest over time, on performance milestones or both, just like RSAs and options. Whatever the schedule, make the milestones achievable, write them down and say what happens to unvested awards if the person leaves.
For the standard alternatives, see Restricted Stock, Stock Options and the 83(b) Election. If you’d like help designing an equity plan, contact us.
