For a fast-growing company in a competitive industry, growth shares can be a great way to incentivise people, encourage them to stick around and reward them for the part they play in your success. Particularly if your business or people (e.g. advisors, contractors, freelancers, etc.) are not eligible for other share/option schemes, such as the Enterprise Management Incentive (EMI) scheme.
Vestd, the share scheme and equity management platform, explains them here.
What are growth shares and how do they work?
Growth shares are a special class of ordinary share with limited rights.
What’s so special about them? Well, growth shares have no real value when they’re issued. Zero. That means the recipient, let’s call them Danny, faces no Income Tax implications, and the business doesn’t have to pay out either.
Why is that? Growth shares are issued at what’s called a hurdle rate.
A hurdle rate is a small premium* added to a company’s value. And that value is dictated by the company’s share price. Only once the company’s share price exceeds that premium, will Danny benefit.
So Danny gets a share in the company’s growth thereafter, not before. Hence the name, growth shares.
Growth shares go by other names too: ‘hurdle shares’, ‘flowering shares and ‘growth stocks’.
*Typically between 10-40%.
Why growth shares?
Growth shares are a powerful incentive and a way to reward those who help the business reach new heights, including late-joiners.
When the business is sold, they only receive a share in the value above the hurdle – reflecting the value they brought to the business.
As such, existing shareholders are only value diluted for growth from that point onwards, rather than the existing worth of the company, which is reassuring for them.
And if our friend Danny sells their shares, Danny will only pay Capital Gains Tax on the difference between the hurdle and the eventual sale price.
What’s more, growth shares can be conditional, which means that Danny has to meet specific goals, KPIs or milestones in order to benefit.
Otherwise, Danny’s shares can be partially or completely deferred (cancelled). Protecting the business if Danny doesn’t deliver.
Once those conditions are met, the growth shares become unconditional and have full rights to dividends. But even before that point, growth shares can earn dividends, subject to board discretion.
Who uses growth shares?
Growth shares are popular among:
- Scaleups with strong growth prospects.
- Businesses with a clear exit plan.
- Companies battling for talent in competitive industries.
And as a way to:
- Reward those not eligible for other schemes like an Enterprise Management Incentive (EMI), e.g. advisors, contractors, freelancers, etc. or where the company isn’t eligible.
- Instead of or as well as compensating with cash.
- While protecting existing shareholders’ interests (dilution).
- Tap into the Ownership Effect – a powerful motivator.
- And to put conditions in place to protect the business from giving away equity with no real gain.
Growth shares and EIS
There’s a lot of confusion about growth shares and whether they are compatible with the Enterprise Investment Scheme (EIS).
But actually growth shares are fine to be issued alongside ordinary shares that are issued for EIS provided they are structured properly. Learn more about preserving EIS eligibility.
Growth shares and EMI
EMI is the most popular tax-advantaged share option scheme in the UK. Over 14,000 companies use an EMI scheme to align and incentivise employees. But there’s a catch, EMI has stringent criteria. Notably, only employees of UK-based businesses are eligible.
But not everyone who contributes to the success of a business is an employee. That’s where growth shares again come in handy.
Growth shares aren’t as tax-efficient as EMI options but they are more flexible, allowing companies to incentivise and reward key people not on the payroll. Companies can issue growth shares or launch an EMI scheme or both.
How to issue growth shares
The best way to issue growth shares is digitally, it’s as simple as that. Why? To avoid spreadsheet hell. That’s traditionally how CFO, directors and founders managed company equity and share schemes.
Spreadsheets leave a lot of room for human error, and it’s hard to inspire recipients of growth shares with tabs in an excel sheet.
Vestd is an FCA-regulated equity management platform with time-saving features and dynamic dashboards for both admins and recipients.
Here’s how to set up a growth scheme on Vestd:
- Amend the company’s Articles of Association
With the permission of existing shareholders, create a new class of shares (growth shares) or adopt Vestd’s standard template.
Vestd’s standard Articles of Association template includes additional drafting to allow companies to distribute growth shares. And its structure is compatible with EIS/SEIS.
You might need some help with this from a lawyer if you have bespoke Articles already and need to retain some/all of them.
- Create your growth shares scheme
Criteria for share awards, the number of shares etc.
- Get a company valuation
To determine the current market value of the company’s shares.
- Send out growth share agreements for signing
Signed digitally and stored in one place.
- Issue the growth shares
Allocate growth shares and watch the power of equity work its magic!
- Ongoing equity management
Award those who deliver, and defer the shares of those who don’t.