It takes the shield spot, and projects a mirror image of your ship to either the left or right. Gunships won't know which one is the real you (but missiles will still lock on to you). If the hologram gets hit by a railgun or lasers, it will distort slightly. Effect lasts 20 seconds or so, and your shields get a debuff while it is active.
Once upgraded, you can have 2 holograms at once, thus there's only a 1/3 chance the gunship will hit you.