Legal Question in Business Law in California

First, phantom stock or anything resembling phantom stock falls easily within the broad definition of a "security" as meant in securities law. You are not going to "avoid securities issues" by such a plan; you'll only create them. However, the issues may be manageable.

I've heard it said that there are three kinds of securities: registered, exempt and illegal. You obviously don't want to go through a registration process at the SEC and/or any state regulatory body, nor surely do you want to become involved in an illegal sale or issuance of securities. The solution is to find an exemption that fits your needs, learn how to comply with it, and then comply rigorously. SEC Regulation D and one of its three subparts (504, 505 and 506) might be a suitable exemption-from-registration scenario.

By the way, there is considerable doubt whether LLCs may issue securities denominated as "stock." In conventional thinking, stock means securities representing the equity ownership in a corporation. LLCs may, I believe, issue securities that are tradeable and resemble stock in some respects, but they would be designated as "certificates of economic interest" or the like. I find little law, statutory or decisional, on the subject of public or private trading in LLC securities, but I do believe it is perfectly possible.

There are some specific references to giving interests in LLCs to its officers and employees. See for example Corporations Code section 17100(d).