Growth shares in India: using equity when a startup has already gained value

Giving employees equity is relatively straightforward when a startup is just getting started. The company may have limited revenue, an early product and an uncertain valuation. Employees who join at this stage take a risk, and their equity can reward them if the business succeeds.

But what happens when the startup is already worth ₹100 crore?

Giving a new hire ordinary shares or options at this stage can feel very different. The business has already created substantial value, and existing shareholders may be reluctant to share the value they have built with employees who are only just joining.

This is where growth shares enter the conversation.

Growth shares are designed to give holders an economic interest in the future increase in a company's value, rather than the value it has already accumulated. They can offer a way to reward future contributions without giving new participants the same economic entitlement as existing shareholders.

For Indian startups exploring equity compensation, however, there is an important distinction: growth shares are not a standard, standalone statutory share category under Indian company law. Their feasibility depends on the rights being designed, the company's legal structure and the instruments used to implement them.

What are growth shares?

Growth shares are a form of equity designed to participate in a company's future value creation above an agreed threshold.

That threshold might be linked to a company's current valuation, a defined hurdle value or another contractual mechanism. The precise design determines when the shares begin to participate in economic gains and how those gains are distributed.

Imagine a Bengaluru-based SaaS company valued at ₹100 crore. Its founders and early investors have already taken the financial risk of building the business. The company now wants to hire a senior executive who can help expand its international customer base.

Instead of giving the executive an economic interest in the entire existing value of the company, the business considers an arrangement that rewards them if its value grows beyond ₹100 crore.

If the company later reaches a value of ₹180 crore, the executive's growth-linked interest could participate in some of that additional value, depending on the agreed terms.

The logic is simple: recognise the value already created while giving new contributors an incentive to help build what comes next.

Why growth shares become relevant after a startup gains value

Rewarding new hires without overlooking existing shareholders

As startups mature, their equity becomes more valuable. A grant that seemed relatively small at seed stage can carry a very different economic implication after several funding rounds.

Consider a company that has grown from a ₹10 crore valuation to ₹150 crore. It wants to bring in a new chief technology officer whose work could help the business reach its next growth milestone.

The founders want to offer meaningful long-term upside, but they also want to recognise the contributions of early employees and investors who helped build the existing business.

A growth-linked incentive can help frame the conversation around the value the new executive is expected to create from this point onwards.

Making senior compensation more competitive

A growing startup may not have the cash resources to match the fixed compensation offered by a larger company. Equity-linked incentives can help bridge that gap by connecting part of the reward to the company's future performance.

Growth shares may be relevant where the business wants to reward senior leaders for increasing enterprise value over a defined period.

However, the incentive needs to be meaningful to the recipient. Its value depends on the threshold, vesting conditions, dilution, exit outcomes and the rights attached to the instrument. A headline valuation alone does not guarantee that the employee will receive a financial return.

Aligning incentives with long-term outcomes

Growth-linked equity can encourage employees to think beyond short-term targets. Depending on the design, the potential reward may depend on sustained business growth, a future sale or another specified liquidity event.

For example, a startup might want a new leadership team to focus on increasing recurring revenue, improving margins and expanding into new markets over four years.

An appropriately structured incentive can connect the team's reward to long-term value creation. Clear performance measures and vesting conditions are essential, however, so that employees understand what they need to achieve and what happens if they leave before the incentive matures.

How growth shares work: a practical example

Suppose an Indian startup has an agreed equity value of ₹100 crore and introduces a hypothetical growth-linked arrangement for a senior executive.

The arrangement is designed to participate only in value above ₹100 crore. The executive's economic participation is equivalent to 5% of the value above that threshold, subject to the instrument's terms.

If the company's relevant equity value reaches ₹160 crore, the value created above the threshold is ₹60 crore. Five per cent of that incremental value is ₹3 crore.

This is an illustrative calculation, not a guaranteed payout or a statement of how a particular Indian legal instrument must operate.

The actual outcome could differ materially depending on whether the threshold is based on equity value or enterprise value, the company's debt and cash position, investor preferences, dilution, vesting conditions, transaction costs and the contractual payout mechanism.

For instance, an acquisition valued at ₹160 crore does not necessarily mean ₹160 crore is available for distribution to shareholders. Outstanding debt, transaction terms and investor liquidation preferences can affect the amount received by ordinary shareholders.

That is why a growth-share model should be tested against multiple scenarios before an arrangement is offered.

Are growth shares available to Indian startups?

This is where founders need to be particularly careful.

In jurisdictions such as the UK, growth shares are an established form of equity structuring. In India, the phrase describes an economic arrangement rather than a universally available statutory instrument with one standard set of rights.

A private limited company may need to evaluate whether its objectives can be achieved through an appropriately structured class of shares, an employee stock option plan (ESOP), sweat equity or a contractual incentive such as a stock appreciation right (SAR) or phantom equity plan.

These instruments are not interchangeable.

ESOPs give eligible employees the right to acquire shares under the scheme's terms. Sweat equity shares are governed by a separate statutory framework and eligibility requirements. Phantom equity and some SAR arrangements can provide cash-linked economic upside without necessarily giving the recipient actual shares.

A company considering a growth-share-like structure must assess the Companies Act, 2013, applicable rules, its Articles of Association, shareholder agreements, securities-related requirements where relevant and the tax treatment for both the company and recipient.

The appropriate structure depends on the intended rights, who will receive the incentive and how the arrangement will be settled. Indian legal and tax advisers should review the proposed design before implementation.

What founders should consider before introducing growth-linked equity

Start with a defensible valuation threshold

The threshold determines how much existing value is excluded from the intended incentive. Founders should establish how it is calculated, when it is measured and whether it changes after fundraising, share issuances or other corporate events.

Define vesting and exit conditions

The agreement should explain when the incentive vests, what happens when an employee leaves, how good-leaver and bad-leaver scenarios are treated and whether a sale accelerates vesting.

Model dilution and investor rights

New funding rounds can change the ownership structure and affect the economic value available to participants. Founders should model the incentive alongside existing shares, ESOP pools, convertible instruments and investor preferences.

Understand the tax and compliance implications

The tax treatment depends on the instrument and the events that trigger income or gains. Share-based awards, options and cash-settled arrangements can produce different outcomes. Founders should not assume that a growth-linked incentive will receive the same treatment as an ESOP.

How Vestd India helps founders plan equity as they scale

As a startup grows, managing equity becomes more complex. Founders need to understand existing shareholdings, employee option commitments, potential dilution and how future funding rounds could change the ownership structure.

Vestd India helps businesses manage cap tables, shareholders, ESOPs and equity-related processes through a connected platform.

For a company exploring growth-linked incentives, accurate ownership records and dilution modelling provide a useful foundation for evaluating how a proposed arrangement could fit into its wider equity structure.

Founders can review existing holdings, understand the potential impact of additional equity commitments and maintain clearer records as the business evolves. The specific legal instrument, valuation threshold, tax treatment and contractual rights still need to be designed with qualified advisers.

The bottom line

Growth shares address a specific challenge: how to reward people for increasing a company's value when much of that value already exists.

For Indian startups, the concept can be useful when hiring senior leaders, incentivising future performance or balancing the interests of existing shareholders with those of new contributors. But implementing it requires more than setting a valuation threshold and assigning a percentage.

Founders need to choose an appropriate legal structure, define the economic rights, model future funding and exit scenarios, and understand the tax consequences before making commitments.

Equity compensation should reflect where a business is today and what it wants to achieve next. When the structure is designed carefully, it can help a startup reward the people responsible for building its next chapter without losing sight of the value created along the way.