How growth shares incentivise employees
What they are, how they work, the benefits for employees and companies, and key tax considerations
In a new briefing, partner Thomas Clark explains how growth shares can be used to reward and retain key employees while aligning their interests with long-term company performance.
What are growth shares?
Growth shares are a form of employee equity incentive that allows employees to share in the future growth in value of a company, without benefiting from the value that already exists at the time the shares are issued.
They are commonly used by private companies to reward and retain key employees whilst reserving value already built up for existing shareholders.
In simple terms, growth shares only become valuable if the company grows in value.
How do growth shares work?
When growth shares are issued, a hurdle value is set. This represents the company’s current market value and is usually supported by a professional valuation.
If the company is sold or exits below the hurdle, growth shares receive little or nothing.
If the company exits above the hurdle, growth shareholders participate in the value created above that level only.
Why use growth shares to incentivise employees?
Growth shares are increasingly popular because they offer a balance between low-cost incentive and control.
Benefits for companies:
- incentivise employees without giving away existing value
- align employee rewards with long-term company performance
- keep initial start-up costs low due to low day-one value
Benefits for employees:
- participate in company growth and exit proceeds
- gain potential for significant upside on a sale or IPO
- enjoy lower upfront cost compared to ordinary shares
- see clear link between performance and reward
Tax treatment of growth shares
The tax treatment of growth shares depends on how they are structured and valued at the point of issue.
Growth shares are typically designed to have a low initial market value, which can reduce income tax and National Insurance liabilities on acquisition. Future gains may then be subject to capital gains tax, rather than income tax.
However, HMRC will closely scrutinise:
- the share rights
- the valuation methodology
- leaver provisions and restrictions
Specialist legal and tax advice should be obtained prior to the issue of growth shares to ensure that full documentation is available to support any HMRC review at a later date.
When are growth shares most appropriate?
Growth shares are particularly well suited to:
- established but high-growth businesses
- founder-led companies planning a sale
- businesses looking to attract and recruit senior executives
- companies looking for alternatives to EMI share options, especially if employees require ‘skin in the game’
- private equity-backed businesses aligning management incentives
Summary
Growth shares can be a highly effective way to incentivise employees, retain key talent and drive long-term growth while protecting existing shareholder value. When properly structured, they align everyone to the goal of increasing the value of the business.
About Thomas
Thomas Clark is a partner in the corporate and commercial team. He advises clients on a wide range of matters with a main focus on acquisitions and disposals.
Get in touch
If you would like to speak with a member of the team you can contact our corporate and commercial solicitors by telephone on +44 (0)20 3826 7539 or complete our enquiry form.
