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DEFINED FOR FINANCIAL ADVISORS

By Dr. David Edward Marcinko MBA MEd

SPONSOR: http://www.MarcinkoAssociates.com

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Think of synthetic equity as a communal garden. You don’t own the plot, and you don’t necessarily have a say in what’s planted, but you’re guaranteed a share of the crops that are harvested. 

CITE: https://www.r2library.com/Resource/Title/0826102549

Synthetic equity is a form of deferred compensation that mirrors some of the benefits of real stock ownership without granting actual shares. It’s a contractual agreement between you and your employer that entitles you to a payout upon certain events—such as an IPO, acquisition, or surpassing earnings milestones.  

Companies use synthetic equity plans to motivate their personnel through growth-related incentives. In other words, it grants employees a sense of ownership without issuing shares or altering the business’s ownership structure. As the company succeeds and appreciates in value, so does your potential payout. Although you don’t own actual shares of company stock, you are compensated as if you did. 

READ: https://tinyurl.com/mr3upbn6

According to Carla McCabe, synthetic equity programs also have a significant tax advantage to both business owners and the key employees.

For example, when a key employee receives shares under the firm’s synthetic equity program, the IRS does not recognize that receipt as taxable income to the employee until he or she actually receives the money. This usually occurs when the firm is sold or when the employee retires and is cashed out (assuming the employee’s synthetic shares are vested). This is very attractive considering that regular shares are taxed as ordinary income and the employee basically has to pay the associated tax even though he or she didn’t receive any cash.

Of course, all this begs the question: Why would a company offer synthetic equity instead of actual equity?  

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