re: Phantom Stock -- value at issuance if triggered only at company sale?

I am interested in giving my employees a small amount of "phantom stock" in my S Corporation; I am 100% owner of the outstanding shares at this time.

I want them to share in the upside if I am so fortunate as to sell the company. That would be the only situation that they would receive a "pay day."

Question: Are all Phantom Stock Plans subject to Section 409(A) of the IRS Code and is a fair market valuation required at the time they are granted?

** What if the value is totally dependent on the company being sold (and the "phantom stock" is subject to forfeiture if they leave the company's employ)? The trigger event and dates are therefore highly uncertain. I do, however, intend to have the phantom stock equate to some number of common stock shares (if that makes a difference). **

At time of payday, I was hoping to structure it sot that the entire monetary value that they receive would be taxable at ordinary income tax rates.

I was hoping to avoid all of the pitfalls of ISOs and NQSOs and not create a taxable event at time of Phantom Stock issuance. And don't see these being the same as Stock Appreciation Rights (SARs).

I was also advised that they would need to be granted subject to a qualified deferred compensation plan (whatever that means).

Any advice or answers to my questions from people familiar with corporate tax law would be appreciated.

Thanks for your help! Michael Lederman snipped-for-privacy@gmail.com Boston, MA