Unapproved options vs growth shares: What’s best for non-employees?

If you’re looking to incentivise or reward someone with a stake in your business, who isn’t on the payroll (and therefore doesn’t qualify for EMI options), knowing the right route can be tough. 

When rewarding advisors, consultants, and other individuals who help to shape your business, but aren’t employees, you’ll likely reach the same crossroads: Unapproved options or growth shares?

Both are smart and flexible ways to bring non-employees onto your cap table and into your equity mix, but both operate quite differently. The right choice for you will depend on your company stage, growth expectations, and the complexity of the share structures you want.

Let’s unpack both options, so you can see which suits you best.

The basics: What are unapproved options and growth shares?

Unapproved options give recipients the right to buy shares in the future, usually at today’s market price. The options are often exercised and converted to shares when the company is old, or at a liquidity event. 

This means they don’t own anything yet, but they have a guaranteed opportunity to benefit from future success, should the right conditions be met. 

By contrast, growth shares are actual shares issued straight away. These shares will only benefit from future growth above a pre-set threshold, known as the hurdle.

Essentially, with unapproved options, the recipient might own shares at a later date. With growth shares, they do own shares, but they only hold value after the hurdle is reached.

Similarities between the two

Before we dive into what separates the two, it’s important to know their similarities. Both routes are: 

• Flexible ways to reward non-employees: People who help the business grow, but don’t qualify for EMI.
• Performance-based: Recipients will only benefit if the company grows to a certain level.
• Customisable: You can build in performance and time-based milestones and vesting schedules to ensure people earn what they receive.
• A great way to incentivise retention: Both help to keep people financially and emotionally tied into the company’s success.

Essentially, at their core, both schemes are about sharing in future success, they just go about it in a different way.

Key differences

You might be setting up unapproved options or growth shares for the same reason, to reward someone’s contribution, but the two schemes can play out very differently in practice. 

Their differences affect everything from structure to tax treatment, and understanding them will help you pick the right approach.

1. Ownership and timing

With unapproved options, ownership comes later, when the option is exercised. Until then, the recipient just owns a contractual right to shares, under certain conditions.

With growth shares, ownership is immediate - the recipient becomes a shareholder from day one.

That difference in timing can shape how each approach feels to the company and the recipient. Options often act as a future promise, helping motivate performance over time, while growth shares offer an instant sense of ownership. 

Depending on your stage, the nature of your relationship with the recipient, and what you’re trying to achieve - short-term alignment or long-term commitment - one may hold more weight or perceived value than the other.

2. Tax treatment

This is one of the main differences between the two schemes, and this is often the deciding factor between them both.

Let’s say you wanted to reward a non-employee contributor: 

For unapproved options: 

These are typically granted at the current market value, and exercised at an exit or liquidation event. 

There’s no upfront tax, but when the option is exercised (i.e. when the shares are bought), the difference between the exercise price and the market value is treated as income, - not capital gain. 

This means it’s subject to income tax, which could be as much as 40%, if the recipients fall within a higher tax bracket.

For example: 

• Option granted at £1 per option
• Sold for £10 per share at a qualifying event
• The £9 gain is taxed as income at 40%, and it may also be subject to National Insurance deductions too.

It’s simple, but not the most tax-efficient structure, especially for non-employees who can’t access EMI or tax reliefs.

For growth shares

Growth shares are actual shares issued upfront, usually at a very low market value. Then, a hurdle is set above the market value, and above the hurdle is when the shares start accruing value for recipients.

When the business grows and the shares are eventually sold, the gain is taxed as a capital gain, not income, usually at 24% CGT. 

For example: 

• Shares bought at £1 per share
• Hurdle is set at £1.20 per share
• Shares sold for £10 per share

The £8.80 gain is then taxed at 24%, still giving the recipient £6.69 profit. 

In plain terms: both paths can deliver the same raw value, but growth shares usually mean keeping much more of it after tax.

3. Complexity and terms

If simplicity and speed is your aim, unapproved options are likely to be your winner. They don’t require changes to your company’s Articles or new share classes, just a clear option agreement and valuation.

Growth shares need a bit more setup: you’ll usually create a new share class, set a hurdle, and make minor legal amendments. Whilst it is a little more admin, it's generally a one-time setup, and typically pays off through tax efficiency and flexibility.

Choosing the best one for you

Here’s a simplified way to think about the differences between the two:

Unapproved options might be preferable if you want something fast, flexible, and simple to set up. Because there’s no need to create a new share class or amend your articles, it’s often the quickest way to bring non-employees into your equity picture. 

Just remember that these aren’t actual shares until the options are exercised, they just represent a right to buy equity later.

When that happens, any growth in value is taxed as income, which can reduce the recipient’s overall benefit when compared to growth shares, particularly if the company has grown significantly by the time of exit.

Growth shares are ideal for high-growth companies looking for a tax-efficient solution. Recipients get real shares, not options, from day one - meaning they’re shareholders immediately. This can be a motivating retention factor and helps cement a longer-term sense of ownership.

Choose Vestd 

With Vestd, you can easily set up the right scheme for you at the click of a button. Our platform lets you set up fully flexible option and share schemes that grow with your business, including growth share schemes and unapproved 

Set fully customisable time and performance-based vesting conditions, issue shares instantly, and stay compliant thanks to our seamless two-way Companies House integration.

Whether you’re incentivising advisors, consultants, or future team members, Vestd makes it simple to bring people in and share your success.