Growth shares are a special class of share which enables the holder to participate in the growth of a company from the point of issue.
They can be a useful way to motivate and reward key employees, advisers and contractors, without diluting existing shareholders. They are used in high-growth businesses, normally those aiming for an exit.
As an example, let's imagine that a company's shares are currently worth £10 each. Growth shares are issued at a 'hurdle' of £12/ share. This means that the growth shareholders will share in any eventual sale proceeds above £12/ share. Existing shareholders are only diluted in terms of growth from that point upwards.
The hurdle is normally set at a level somewhat above the current value (as in the above example), to limit the risk of the recipient having to pay any income tax on receipt of the shares. Provided growth shares are structured correctly, with the recipients paying full value for them, there is no income tax or NIC at the point of issue. Capital gains tax would of course be paid by the shareholder following a sale.
Why give growth shares?
Businesses give growth shares in order to:
- attract and retain key people (who may or may not be employees);
- give recipients a sense of ownership and aligned goals;
- provide a reward in equity, as well as or instead of cash; and
- enable key people to benefit from the growth they help create.
Advantages of growth shares
The advantages of growth shares include:
- limiting the risk of an income tax charge when the shares are issued;
- avoiding the dilution of existing shareholders in terms of value already created;
- conditionality can be built into the articles;
- can be issued in circumstances where EMI options aren't possible (for example to non-employees, or in sectors that are prohibited from issuing EMI options).
Disadvantages of growth shares
There are some disadvantages to growth shares:
- The normal rate of CGT will apply on disposal unless the shareholding is at least 5% at the point of exit and the other conditions for Business Asset Disposal Relief are met;
- Caution must be exercised if the company has also issued, or intends to issue, shares under a venture capital scheme such as EIS or SEIS;
- Unlike with EMI options, the value of the growth shares cannot be agreed in advance with HMRC - therefore it is crucial to have robust and thorough valuations to support any growth share scheme.
Your flexible friend
There are few restrictions or special criteria that apply to growth shares. They may be used as an alternative to, or even in combination with, tax advantaged share schemes such as Enterprise Management Incentives.
Speak to us
If you'd like to know more about growth shares and to discuss whether they may be right for your company, contact us today.