In the competitive world of dental practice ownership, retaining top associate dentists is crucial for both patient continuity and the long-term value of the practice. One increasingly popular strategy to incentivize high-performing associates is phantom stock — a powerful financial tool that mimics real equity ownership without requiring actual stock issuance or giving up voting control.
What Is Phantom Stock?
Phantom stock is a contractual agreement that provides an employee — in this case, an associate dentist — with the economic benefits of owning stock in a practice, without granting actual equity or ownership rights. These “phantom” shares are not real shares, but they are treated as if they were for purposes of calculating financial payouts in specific situations, such as the sale of the practice.
Key Principles of Phantom Stock for Dental Practices
No Voting Rights or Ownership Dilution
Phantom stockholders do not have any voting rights or say in how the practice is run. The practice owner retains full legal and operational control. This is particularly attractive for owners who want to reward key associates without complicating decision-making or legal structures.
Economic Participation in the Sale of the Practice
The core benefit to the associate is the opportunity to share in the financial upside if the practice is sold. If the owner sells the practice while the associate is still employed and holding phantom stock, the associate receives a payout based on the percentage of phantom shares they were granted — often calculated as a percentage of the practice’s sale price.
For example:
If the practice sells for $2 million and the associate holds 5% of the phantom stock, the associate would receive $100,000 at closing (subject to terms in the phantom stock agreement).
Vesting and Employment Conditions
Most phantom stock agreements include vesting schedules, which require the associate to stay with the practice for a certain number of years before becoming eligible for a payout. This helps with retention and ensures that only committed team members benefit from the eventual sale.
Agreements often include “forfeiture” clauses — if the associate leaves before vesting or under certain conditions (e.g., cause), they may lose some or all of their phantom shares.
Customizable Terms
One of the advantages of phantom stock is its flexibility. Practice owners can tailor:
- The percentage of phantom shares granted
- Vesting schedules (e.g., 5-year graded or cliff vesting)
- Triggers for payout (e.g., sale of practice, retirement)
- Conditions under which phantom stock can be forfeited
These agreements are legal contracts and should be drafted with the help of an attorney familiar with both dental practice transitions and employment law.
Tax Considerations
Phantom stock is typically taxed as ordinary income when paid out, not as capital gains. Both the associate and the practice owner should understand the tax implications and plan accordingly. The practice may be able to deduct the payout as a compensation expense.
Why Use Phantom Stock in a Dental Practice?
Offering phantom stock helps align the associate’s interests with the long-term success of the practice. It fosters loyalty, reduces turnover, and motivates associates to contribute to the practice’s growth and profitability.
For practice owners preparing for eventual sale or retirement, phantom stock can be a way to reward associates who help build value — without giving up control or undergoing the legal complexities of actual equity transfer.
Final Thoughts
Phantom stock is not a one-size-fits-all solution, but for many dental practices, it offers a compelling blend of incentive, flexibility, and control. If you are a practice owner looking to retain and reward your top associate dentists — or an associate dentist interested in becoming more invested in the success of your practice — phantom stock may be a solution worth exploring.
At Oberman Law Firm, we provide expert guidance regarding the creation and implementation of phantom stock agreements.
About Us
Oberman Law Firm represents clients in a wide range of practice areas, including private equity, M&A, healthcare, corporate transactions, intellectual property, data privacy and security, regulatory compliance and governance, cross-border transactions, labor and employment, construction law, litigation, private clients’ services, corporate restructuring, and white-collar and governmental disputes.
As a firm, we offer the highest quality legal advice coupled with extraordinary and tailored service to deliver exceptional results to our clients. Our philosophy is to invest deeply in the brightest legal talent and build dynamic teams that operate at the pinnacle of respective practice areas. We believe in empowering our attorneys, encouraging entrepreneurialism, operating ethically and with integrity, and collaborating to bring the very best to every client engagement. These principles have guided us in building extraordinary and successful long-term partnerships with our clients.
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