The first step to setting up a Growth Share scheme.
What is a hurdle rate and how is it set?
A hurdle rate is the level, in £ per share, above which the beneficial owner of that share will have full economic rights to the company in question.
For example, let's say your company is currently valued at £1 per share and you want to issue growth shares to a new employee.
Hurdle rates often carry a small premium to reflect the hope value of the shares - so in this instance it could be set at £1.20.
The hurdle rate quite literally acts as a hurdle the recipient must overcome for their shares to carry value, and it incentives them to help the company grow, as any value above their hurdle is theirs to keep.
A few years later, the company has grown and is eventually sold for £5 per share. The recipient is rewarded for their hard work and takes home the amount above their hurdle - in this case, £3.80 per share.
Ordinary shareholders will participate in the full amount of the sale.
Growth shares and hurdle rate are not just an incentive for growth, but also protect existing shareholders from dilution and simultaneously respect the work they've put in to grow the business thus far.
As the company grows, hurdles can increase. Using the example above, if another employee joined a year later, their hurdle could reflect the current share price plus a small premium - let's say £2.20.
When recipients receive their growth shares, they shouldn't incur a tax liability as the growth shares are essentially worthless at the time of issue.
They will only need to pay Capital Gains Tax on the eventual sale of the shares - based on the difference between the eventual share price and their hurdle rate.
How can I get a hurdle valuation?
Unlike an EMI valuation, a hurdle valuation cannot be approved by HMRC before issuing the shares. Instead a 'self-assessed' valuation for the current value of the shares is set, and a small premium is then applied to reach the hurdle. This valuation is then kept on record.
Because it cannot be approved by HMRC, a hurdle valuation will need to be more conservative (a little higher) than an EMI valuation, to make sure there are no nasty surprises down the line. Other than this factor, and some slight differences in the format of the report itself, the valuation process is largely the same as it is for EMI.
When you'd like to start a new hurdle valuation, one of our valuation specialists will work directly with you to create your valuation report. They’ll guide you through the whole process, let you know what documents we need from you and make sure nothing is missed.
Simply contact the team when you'd like to get started firstname.lastname@example.org.
Once the valuation process is underway, the next step is to adopt the Vestd Articles of Association or add the Growth Share clauses to your existing Articles.
Our team, content and app can help you make informed decisions. However, any guidance and support should not be considered as 'legal or financial advice'.