What are growth shares?

In this guide, we’ll cover everything you need to know about growth shares so you can decide if growth shares are a good fit for your company.

What are growth shares?

Growth Shares are real shares issued upfront at a hurdle rate.

Technically speaking, growth shares are a special class of ordinary shares with limited rights.

Ordinary shares (also known as common shares) are what most people think of when they think of shares. 

Growth shares are a little different. They allow you to reward people for the part they play in growing your business, but not the value that was created before they joined (or started working with) your company. 

It’s totally legal for anyone to own growth shares in your business - including non-employees. They’re actually one of the most flexible ways to incentivise key people.

How do growth shares work?

Growth shares are issued at a hurdle rate, which is usually set at 10-40% higher than the company's current share price.

Recipients only share in the capital growth of the business on anything above the hurdle rate.

Example

You’ve just recruited a new Head of Sales and want to give them growth shares. The shares are currently worth £2. So the hurdle rate would be £2 plus a small premium, let’s say 20%, so £2.40.

Their growth shares aren’t worth anything until the value of their shares rises above that hurdle rate you set.

You can also set conditions that they need to meet or they risk losing the rights to their growth shares.

The benefits of growth shares

EMI options, unapproved options, and growth shares all come with their own pros and cons. But mainly pros! Let's explore the benefits of issuing growth shares so you can decide whether they're a good fit for your business and objectives.

Here are seven reasons why growth shares rock:

1. Issue growth shares to whomever you want

Growth shares can be issued to employees and non-employees such as accountants, consultants, contractors and freelancers - essentially anyone who contributes to your company's success - including people overseas.

So you can use growth shares to incentivise and reward anyone who helps your business grow!

2. Incentivise new shareholders (without alienating existing ones)

Growth shares motivate new shareholders to help grow your business as much as possible because the value of their growth shares is dependent on the business' growth.

And because recipients only share in your company’s capital growth from when they come on board, they don’t dilute the value of the stake your existing shareholders have in your business. 

3. Issue growth shares alongside (or instead of) EMI options

While an EMI scheme is usually the most tax-advantageous options scheme for both businesses and employees, not all are eligible. Growth shares, which are a lot more flexible, can pick up where EMI falls short – or even be used as an alternative. 

4. Issue as many growth shares as you want (with no restrictions)

Unlike EMI share options, which are limited to companies of 250 people or fewer (alongside other restrictions), there’s no HMRC restriction on which companies can issue growth shares – or how many people they can issue them to.

5. Issue growth shares with or without voting rights

Your growth shares can come with full voting rights or not – the choice is yours. Most companies don’t attach voting rights to their growth shares, but the option is there if it makes sense for you

6. Rights to dividends

Growth shares are a good option for startups and scaleups with an exit on the horizon.

But they're an even better option for businesses without an exit in sight because - unlike options - growth shares can have full rights to dividends once they become unconditional (that is when the recipient achieves whatever milestone(s) you set).

So long as your board decides to give dividends to that class of share, and your company's Articles of Association allow it.

Your company's AoA needs to outline how growth shares work in relation to other shares. Unlike most AoA out there, the Vestd Articles of Association do just that, so many customers adopt those as it's included in the cost of our price plans.

Alternatively, you can pay a lawyer or specialist to modify your existing articles, which could cost upwards of £10k.

7. Improve retention and drive performance

Studies show that people with even a small piece of the pie are more motivated to succeed and inclined to stick around for longer. It's called the Ownership Effect and it's pretty powerful.

What's more, you can set conditions someone needs to meet in order to receive their growth shares.

If they fall short of those expectations, which are usually time or performance-related, they won’t receive their cut of your business or at least not all of it. This protects you from giving equity to people who don’t deliver on their promises.

We've collected a load of real-world examples you could consider for your conditional growth share scheme. Download the guide below.