Growth Shares

Growth shares (also known as hurdle shares) are a type of employee share scheme that allow participants to acquire shares with a low initial value because they only share in the company's value to the extent it exceeds a pre-set hurdle. They can be issued to select employees, directors (including non-executive directors), consultants, and advisers.

How Growth Shares Work

Growth shares are a special class of shares and act like an option grant: participants gain from the company’s growth, not its historic value. This means they share in the upside created after the shares are issued, normally turned into cash on an eventual sale or flotation.

They are ideal if your company:

• Cannot grant EMI options, or
• Wants to complement an existing EMI plan.

Example:
A company valued at £5 million grants growth shares to a new senior management team, giving them 20% of any proceeds above a hurdle of £5 million. If the company sells for £7.5 million, the team shares £500,000. Unlike a bonus plan, this is taxed as capital gains, not income.

How They Are Implemented

Once the class of shares is created, growth shares can be issued in two ways:

• Purchase: Participants can buy shares outright for a very low purchase price, reflecting their low initial value.
• Option Grant: EMI options can be granted over growth shares.

Professional advice on valuation should be sought before growth shares can be issued.

Retention and Leavers

Growth shares can help to retain key people. To encourage participants to stay you could stipulate:

• Shares may need to be sold for nominal value if the holder leaves, or
• that sale terms may depend on the reason for leaving (good or bad leaver).

Considerations

• Tax: There are no statutory tax advantages, and capital gains treatment is not guaranteed.
• Enterprise Investment Scheme (EIS) Investments: Shares must not have inferior rights to ordinary shares if investors claiming EIS relief are involved.
• Timing: Growth share awards made only once. It is often difficult to make repeat awards in subsequent years because if the company's value has increased it may then be necessary to create a new class of shares with a higher hurdle.

Want a quick overview? Watch our short animated video on growth shares below.