Key terms, tax benefits and your My Equity page.
First of all, congratulations! You’ve been issued shares in a company.
Depending on the future growth of the company, your equity could turn into a life-changing sum. Plus it shows the company values your hard work.
But you’re probably wondering, what does all this mean? Here we’ll explain the top 5 things you need to know about your growth shares.
1. Your Task Agreement
The Task Agreement is the contractual agreement between you and the company that has issued you the growth shares. While there isn’t a separate document for the Task Agreement, both parties are legally bound to it when the growth shares are accepted.
The ‘task’ explains what you need to do to ‘earn’ your shares. The conditions attached to your shares, along with your vesting schedule and hurdle price (more on all this later) will be available on your My Equity page and agreement summary.
Once you have accepted the growth shares, you must pay the issuing company nominal value for the shares. The company should contact you to confirm the total amount payable and facilitate the payment.
2. Key terms
As we alluded to above, there are quite a few terms surrounding growth shares that you may or may not be familiar with. So let’s get into what they all mean.
Growth shares are a type of conditional equity. They’re real shares in the company with a few strings attached. So long as you fulfil the conditions in your agreement, your growth shares will vest.
Vesting is how you ‘earn’ your growth shares. As you fulfil the conditions of the option agreement (these can be time or performance-based conditions) your shares vest and become yours to keep. How your options vest will be determined by your vesting schedule…
Your vesting schedule is the timeline over which your growth shares vest. For example:
- The shares vest over a 4-year period, with 25% vesting each year.
- The shares vest over a 1-year period, with 25% vesting each quarter IF quarterly revenue targets are hit.
Every time a set of shares vest is called a tranche. These tranches can be monthly, quarterly, yearly, or based on key performance milestones.
Your vesting schedule may contain a cliff, which is essentially a waiting period from when you accept the agreement to when the first tranche of growth shares vest. For example, a 4-year vesting period with a 1-year cliff.
3. The hurdle
Growth shares are designed to reward people for the value they add to the company after they join, not before.
This is where your hurdle comes in. The hurdle price is based on the company’s share price at the time your growth shares were issued, plus a small premium to reflect ‘hope value.’
You will benefit from the increase in share price above your hurdle – i.e. you’ll be rewarded for the work you do to help grow the company from this point onwards.
The amount below your hurdle is reserved for ordinary shareholders – again to respect the work they have put in to grow the company to this point.
For example, let’s say the current share price is £1 and you have a hurdle of £1.10. In 4 years time, the company is being sold for £3 per share. You will receive £1.90 per share, and any ordinary shareholders will receive the full £3 per share.
Likewise, if more growth shares were issued 2 years after you received them, they will have a higher hurdle to respect the work you’ve done in the previous 2 years.
It’s worth mentioning that growth shares cost the recipient (you) nominal value of the shares – not the current share price.
So while you pay pennies for shares that are worth £1 each, an ordinary shareholder would pay the full £1 per share.
When you factor this in with the share sale example above, the £1.90 per share you participate in is essentially all profit. Whereas ordinary shareholders that bought in at say £1 per share have to deduct that from their sale price.
As growth shares are issued 'out of the money' (they’re issued below the hurdle, and anything above the hurdle is when they become valuable), no tax liability is created on receipt.
In fact, you will only incur a Capital Gains Tax liability at the usual rate when you sell the shares. That is after you've used up your CGT allowance, of course.
In a nutshell, the shares on receipt are worthless – but the company itself is not. In fact, it may already be a well-established, profitable company.
So you’re paying nominal value for shares that already have value – and get to reap the rewards of the growth from your hurdle rate onwards.
5. My Equity
Now all the legal stuff is out of the way, let’s talk about your My Equity page.
In the past, share schemes like yours were just long, boring contracts nobody understood.
But Vestd works with thousands of companies to digitise their share schemes and help recipients like yourself understand the real value of their equity.
My Equity contains all the information we’ve explained above and presents it in a dynamic graph with current and future potential profit calculations.
There’s also a dynamic tax calculator that works out your tax liabilities and potential profit based on the information in the graph above and the type of equity you hold.
To learn more about your My Equity page, we go into great detail about its features here.
Our team, content and app can help you make informed decisions. However, any guidance and support should not be considered as 'legal, tax or financial advice.'