Growth shares – share schemes
Growth shares are a particularly good share incentive for non‑employees. In contrast to share options (EMI or unapproved), growth shares allow employees (and other recipients) to become shareholders immediately. This type of share can be incredibly flexible - it does not have to meet any statutory requirements or limits and ‘conditionality’ can be applied to protect the business.
Why do businesses give growth shares?
- Attract and retain the best people even if not employees
- Align interests by giving recipients a sense of ownership
- Reward contributions with equity rather than/or as well as cash
- Enables everyone who helps you grow the business to share in its success
What is a growth share scheme?
Growth shares are issued at a ‘hurdle rate’ and provide employees, contractors, advisors and consultants with a share in the capital growth of the business from the point at which they are issued.
For example, if they are issued at a ‘hurdle’ of £1 per share, they will only share in any eventual net sale proceeds that are over and above £1 per share. As such, existing shareholders are only value diluted for growth from that point, rather than the existing worth of the company.
Recipients of growth shares don’t have to pay income tax on exercise, only capital gains tax on sale. This scheme can be complex to create if done manually but is incredibly simple using Vestd.
What are the main advantages?
- By using growth shares you can limit the risk of the recipient having to pay Income Tax on receipt of the shares
- Growth shares are designed so that recipients only share in the capital growth of the business from the point that the shares were issued
- Minimises dilution on existing shareholders
- You can set conditions for recipients, such as achieving milestones, or staying with the company for an agreed period of time, so long as your Articles of Association have been drafted to enable this
- Shares are issued immediately
- A great alternative to EMI options for businesses that are not likely to sell in the short term
What are the main disadvantages?
- Unless the shareholding exceeds 5% at the point of exit, there is no Entrepreneurs’ Relief, so the normal rate of Capital Gains Tax will apply once they have been cashed in
- The value of the growth shares cannot be agreed in advance with HMRC
What are the qualifying criteria and limits of growth shares in the UK?
For the business or recipient
- There are no restrictions with growth shares
For the shares
- The shares are a new and specific class of share
- They can be voting or non-voting
Common questions about Growth Shares
We often get questions whilst helping customers set up their growth share schemes. Here are the most common, which might clear a few things up while you explore your options. If you need further explanation or have additional questions we’d love to help. Speak to one of our specialists for free...
What happens if you give a team member shares and they leave or don't meet expectations?
If the growth share award is still within its ‘conditional period’ then the shares can easily be fully or partially cancelled. It’s important to set this period to be sufficient to judge if the person has met expectation. Once the shares are ‘unconditional’ the recipient is the full owner of those shares (whether they stay with the business or leave) and you will not be able to cancel the award.
How does tax work with growth shares?
On sale, growth shares are taxed as a capital gain, so normally around 20%. In contrast, unapproved options normally attract a marginal tax rate of 40%, if exercised at exit, as they are then treated as income.
Can growth shares have a vesting schedule?
Yes, you can set a vesting schedule in a similar way to options. However, the ‘vesting’ is essentially the removal of the conditionality from a proportion of the total shares at specific dates.
Are my current articles of association compatible?
Usually, we find that some additional elements need to be made to a company’s existing articles to ensure there are sufficient protections for the business to ensure dilution and exits are handled correctly. If you don’t have these provisions you can use the Vestd articles for free. These articles have been carefully configured by our legal partners to ensure that they future proof the company (to the extent possible) to how it might develop, be invested in, and eventually make a sale.
Should there be any conditionality or performance criteria for vesting?
Each growth share award can include a unique and specific set of qualifying criteria. This could be as simple as ‘turn up each day’ or more specific and linked to key project milestone or helping the business meet specific targets. What’s most important is that the criteria is clear and not subjective.
Are growth shares definitely right for me given my specific situation?
Depending on your situation you might also want to consider EMI share options scheme or unapproved options. Speak to one of our specialists (for free) to better understand what might be best for your situation.
Do I need a valuation to issue growth shares?
Yes, all growth shares are issued at a hurdle rate. This is typically a small premium above the company’s value today. Unlike EMI, this value can not be pre-approved with HMRC. However, a valuation (carried out with the support of Vestd or by your accountant) will usually provide a good degree of comfort. Normally, depending on the nature of the company, a premium of 10-40% may be applied to the market value to reflect any “hope value” of the shares, and thus further mitigate any risk of HMRC deciding at some point in the future that these shares had been undervalued at issue. In a worst case scenario, if they so decided, they would charge income tax on any differential between the hurdle and their determined market price at the time.
Who does my valuation and how much does it cost?
If the valuation is carried out by Vestd it is included within the Standard or Guided plan. If your accountant conducts it then you will need to ask them for a quote.
Vestd has the most user-friendly platform and was built for UK businesses, by a team of genuine experts that helped us to get everything set up. What they don’t know about share schemes isn’t worth knowing.
Using our equity to boost business has been a revelation. We needed more customers but wanted to ensure they were right for us and that we could offer them loads of value. By inviting them to be shareholders we’ve created a real community of advocates.
Vestd was great. Loads easier and simpler than doing this the traditional way. Though almost all of the process could be completed online without any direct communication, the Vestd team were always available to answer specific questions at various stages.
The Vestd Team is incredibly helpful and responsive and there is always someone willing to assist - no matter what time of day!
This is the go-to online platform for Founders & CEOs who have zero time to learn and execute the intricacies of tax and equity distribution law.
Vestd has been a brilliant tool for us. We recently closed a $1.1m seed round, and knowing that all the information is stored and processed in one place has been a massive time-saver. The calculators are handy and the dashboard is well-designed. We will definitely be using Vestd to manage our EMI option scheme going forward too. Overall, I would 100% recommend it to other founders.
I’d looked at traditional routes of doing it but I really wanted somewhere I could keep track of all the share movements easily. On Vestd I can clearly see details of the share authorisations, shareholders and the actual shares that have been issued. It makes it so simple.
It was a combination of extremely knowledgeable support and really simple and intuitive technology. You’ve massively simplified the whole share scheme process for everyone involved.
With Vestd I can rest easy knowing all my records and resolutions are organised, secure and easy to view. Now I can concentrate on taking my business forward!
As a Founder, I wanted to reward my early stage team with shares, but with conditions attached. It’s been incredibly simple to use Vestd to build my team, and now that we have successfully completed our first major round of funding, we are looking for everyone to share in our success.
We needed a solution that had the right balance of speed, quality and affordability. Vestd excelled for us on all three. The level of service was far beyond what you’d expect from a software product.
The onboarding was really nice. UX flow is great, well thought out and intuitive. I’m not overstating it when I say it’s the best software service that we use.
The process of giving or receiving shares in a private limited company used to be extremely cumbersome, expensive and confusing!
Vestd have built a product around customer needs as their number one priority, leveraging technology. They have made something that is normally extremely complex and difficult to do, seamless and simple.
The ongoing management of EMI options is a real challenge. It’s great that Vestd have made it possible for the individual employees to be able to view what options they have been awarded via the portal anytime.
My experience with Vestd has been really fantastic. They have an amazing digital experience but have also added great "human" customer service to guide you through the process.
Vestd makes the world of options simple. It’s a one stop shop for anyone looking to bring other people into their project.
Vestd is a great platform for early stage startups to get started with equity incentivisation.
Vestd has done all the tedious groundwork to give a business everything it needs to distribute equity using a simple online platform.
It takes the headache and cost out of allocating equity stakes to anyone helping a company get going.
There has been nothing at all I have disliked! Ifty and his team couldn't be more supportive and helpful.
I felt immediately reassured that the Vestd experts could help us restructure things in a fair and efficient way, with an eye on the future.