Growth shares: issuing equity after your business gains value

At the beginning of a company, equity splits can feel theoretical. When the business is still just an idea, prototype, or early-stage concept, it’s easy for equity conversations to get pushed down the priority list, especially when the shares hold little or no value yet.

Equity conversations may then be parked until later - after launch, traction, or investment rounds take place.

However, this is exactly when you should issue shares. As soon as the business holds value, any share movement is likely to result in a tax liability for the recipient.

In the early stages, a company typically holds very little market value, allowing founders to split ownership before meaningful value is created.

Once the business begins gaining traction, raising investment, or building commercial value, issuing shares can create a tax liability for the recipient at the time they’re acquired. But we know that business growth rarely follows a perfectly structured path.

Sometimes a co-founder joins later, sometimes equity discussions get delayed whilst products are in production, or sometimes the company raises investment quickly before founder ownership is properly sorted out.

Once a company has value, issuing ordinary shares can create a significant personal tax burden for the recipient, even if they haven’t received any cash.

This is one of the biggest reasons growth shares have become such a popular solution for scaling startups trying to solve equity retrospectively.

Rather than giving someone access to the value already built into the company, growth shares are designed to reward future growth instead.

Why issuing shares later can become a tax problem

When someone acquires shares in a company when the shares already hold value, HMRC may deem that as taxable income, which is then taxed at the recipient's marginal tax rate (up to 45%).

To avoid this, you should sort your equity splits whilst the company holds little to no value. If the company is worth very little at incorporation, there is usually little difference between the subscription price and market share value.

Once the business starts building value, the situation changes. For example, a business that has:

• raised investment,
• net asset position, or
• material revenue,

may now have shares with substantial market value attached to them. Issuing ordinary shares at that point can create an immediate tax exposure for the recipient, despite the fact that they may not be receiving any cash at that time.

This is where growth shares come in.

How growth shares work

Growth shares are a special class of shares designed to participate only in future company growth above a set hurdle. The hurdle is usually linked to the company’s current market value at the time the shares are issued.

For example:

• The company is currently valued at 500k
• The growth shares are issued with a 500k hurdle

This means the shares will only participate in value created above 500k.

Because the shares only benefit from future growth, not the value already sitting inside the business, their market value at the point of issue is significantly lower than it would be if they were ordinary shares.

How growth shares minimise upfront share value

Because growth shares only participate in future growth above the hurdle, they are typically issued ‘out of the money’, meaning they hold no value at the point of issue. This makes them particularly useful for retrospective equity planning once a company has already gained value.

Unlike growth shares, ordinary shares participate in both the value already built into the company and any future upside. Once a company has meaningful market value, issuing ordinary shares can become expensive from a tax perspective.

Growth shares help avoid this problem by only participating in the value created after the shares have been issued.

As a result, the recipient will often only need to pay a nominal amount for the shares upfront instead of a hefty income tax bill, with any future increase in value typically falling under Capital Gains Tax on sale.

Growth shares, vesting, and aligning contributions

Growth shares are also great for baking in vesting conditions to implement a scheme that rewards performance and commitments - not just seniority.

Implementing proper vesting schedules will help to maintain a balanced cap table that is reflective of the effort and commitments each individual has made to the growth of the company.

Without vesting, a founder can leave early whilst still retaining a large ownership stake indefinitely.

Growth shares help to align incentives by combining them with time or performance-based conditions to their share allocations, and incorporating leaver provisions to deal with what happens to shares if a shareholder exits.

This helps ensure future equity is tied to ongoing contribution rather than simply granted outright on day one.

The biggest advantage of growth shares

In addition to their flexibility, the main advantage of growth shares is the fact that you’re able to separate out historic value from future value created.

That’s what makes them so useful for scaling companies. Growth shares help align incentives around future growth.

By separating historic company value from future value creation, growth shares allow businesses to reward ongoing contribution without exposing recipients to significant tax charges on value that already exists.

Set up growth shares with Vestd