The benefits of growth shares

April 28th 2020

The Benefits of Growth Shares

What is a growth share?

Growth Shares are an excellent way for private companies to incentivise and reward an employee with the future growth of the company. On creation of the class of growth shares, the company will decide on an equity ‘hurdle’. On the sale of the company growth shares will be entitled to a percentage of the value of the company above that equity hurdle.

This enables a company to reward employee’s or family members with some of the future growth of the company without diluting the value of the existing shares.

Growth shares are not an option scheme which means they can also be designed with dividend rights and voting rights at the discretion of the board and shareholders of the company.

Top 5 Benefits of growth class shares

  • Low or zero income tax at the time of the award
  • Share scheme structured to incentivise company growth
  • Can be subject to transfer restrictions and forfeiture on leaving or if conditions are not met
  • Does not dilute existing shareholders
  • Can include dividend scheme for annual performance reward

How to Issue Growth Shares

Creating a new class of shares is not unusual as a company grows and evolves and wants to reward its shareholders differently, see our article on alphabet shares. Our company secretarial team can discuss your company requirements and draft new provisions in the articles of associations and shareholders agreement to allow for new classes of shares each with carefully designed rights.

There are several matters to be agreed in principle by the board and shareholders when setting up a growth share scheme. The first consideration will be the current valuation of the company, the ‘hurdle’ for the growth shares, and what portion of the growth of the company the growth shares will participate in.

Growth shares can be acquired at zero cost to the recipient, which is often the preferred route when rewarding employees with the scheme. If however the growth shares are being designed for someone new to join and invest in the business then the board may decide that the shares should have an acquisition cost, this will all depend on the current valuation of the business and the hurdle point.

The rights attached to a new class of growth shares should also be decided by the board and shareholders when considering the scheme. These include voting rights, dividend rights and capital considerations, these can also be phased over time or restricted.

Leaver provisions should also be agreed upon as if a clause is not included in the articles or shareholders agreement then the recipient will automatically retain their growth shares after they leave the company.

Our company secretarial team can discuss your particular considerations and will draft bespoke growth-share rights in the memorandum and articles of association and the shareholder's agreement.

Growth Shares V’s EMI Options

Growth shares are issued immediately so the shareholders can benefit from any rights that come with the shares including dividends and voting rights. Growth shares can also be acquired by non-employee’s – such as outside consultants or family members whilst EMI share schemes are only for current employees.

EMI options may work out as more tax efficient in the long run as Income tax is incurred at the time of exercise rather than at the time of the award. This also means however that the employee will have to pay income tax on the shares before they receive any financial returns from them

At exercise, EMI schemes benefit from the entrepreneur's relief rate of capital gains tax at 10% so long as the shares have not been sold within 24 months of their award. Growth shares do not carry this benefit.

If you are looking at growth shares for your company please get in touch with our company secretarial department and one of our qualified company secretaries can discuss your objectives. We will review your company documents and redraft your company articles and shareholder agreements with a class of growth share.

You can find the full menu of company secretarial services here

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