Growth Shares

Service overview: Growth shares – employee incentives lawyers

  • Growth shares are an equity-based tax-efficient share incentive scheme, typically provided for the benefit of key employees. They’re non-tax advantaged, meaning they are not part of tax-advantaged schemes which must meet specific legal requirements set out in the tax legislation in order to receive tax relief, such as EMI share options.
  • Under a growth shares arrangement, companies can sell shares to employees (typically when the market rate is very low) from which the employee shareholders then benefit from an increase in value over a set threshold (or hurdle).
  • As the employee is purchasing the shares outright, they become immediate shareholders.
  • Existing shareholders and founders can be protected from the dilution of their current share value, e.g. if growth shareholders benefit only from any uplift in share price after they acquire their shares or from a share in any value above a target amount.
  • Growth shares can also have sub-types, such as hurdle shares and flowering shares.
  • Growth shares can be highly complex in structure; hence, it is important to seek expert advice from a specialist in this field. We can recommend the most suitable options based on your location, business type, stage of growth, and objectives.

What we do: Growth share legal advice

Growth shares are a class of equity shares given as an incentive to employees. Such shares are typically provided by high growth companies and allow employees to benefit from the growth in the value of the business above a set threshold (known as a hurdle) when the business is sold.

We’re experts in employee share schemes and have set up hundreds for our clients. We’ll typically advise your business on:

  • Which share schemes are best for your situation
  • Designing and implementing your scheme with regards to capital and income entitlement, voting rights, leaver provisions
  • Amending your articles of association to allow for new classes of shares
  • Amending any shareholders’ agreements
  • Impacts of dilution on other shareholders
  • Combining growth shares with other types of share schemes, both HMRC tax-advantaged and non-tax advantaged arrangements, including EMI schemes, hurdle shares, flowering shares and phantom shares
  • Any effects on SEIS and EIS
  • Entering into a section 431 election

Don’t forget, if you need help getting to grips with share scheme law, read our useful advice on What are employee share schemes and how do they work? and A guide to powers, rights, agreements and processes for shareholders.

About growth shares

This type of incentive scheme is often utilised by private unlisted companies. It works by preserving the existing value in the shares, allowing employees to benefit only from the uplift in value. This means that existing shareholders do not see the existing value of their shareholding diluted; which is often of key importance for founding business shareholders.

As the company and/or its shareholders can set a threshold above which growth benefit can be realised, greater control is afforded in terms of achieving specific business growth targets; which is especially important if the intention is to exit the business once sufficient expansion has been achieved.

Under growth share schemes, the employee is directly purchasing the share at market rate (which is typically very low given the early stage of the company) or paying tax by reference to that rate. Employees are incentivised by becoming shareholders immediately, rather than having to wait to exercise the option to purchase shares. The business also benefits as there is less requirement to incentivise through salary payments, rewards being available once growth has been realised.

Growth shares are considered highly flexible in how they are implemented: for example, thresholds beyond which employees benefit can be tailored to business goals and the shares can be made forfeitable should the employee leave the company.

Due to the various types of share incentives available, including HMRC tax advantaged and non-tax advantaged share schemes, it is important to seek expert advice to ensure that your business is using the most appropriate model which is as tax efficient as possible while achieving its intended aim.

HMRC tax implications

  • No tax is payable by the employee when purchasing the growth shares if the full market value is being paid. If a lower amount is paid, tax is payable on the difference
  • When sold, Capital Gains Tax will be payable (at 20% or 40% depending on whether the employee is a higher rate taxpayer)
  • Employees may benefit from the Capital Gains Tax annual allowance
  • Growth shares are considered tax efficient for both employee and employer

Who we help: High-growth companies, start-ups, SMEs, subsidiaries and large businesses

Growth shares are generally most suitable for private companies with high growth and an exit plan. They are a good route if your business doesn’t qualify for HMRC tax advantaged) schemes like EMI share options, for example, because the shares you want to issue are in a company that is controlled by another company, you have non-qualifying subsidiaries, or if you want to offer incentives to people who aren’t direct employees such as non-executive directors or consultants. As we specialise in high-growth businesses, we’ve already helped many businesses to set up and administer the right share schemes for their long-term objectives.

Why use Harper James’ growth share scheme solicitors?

Our employee incentives solicitors are all accomplished lawyers who can advise holistically on choosing the most effective share schemes for your business. Our solicitors have all been recruited from top 100 UK law firms or large international businesses. Find out more about our employee incentives lawyers here:

Pricing plans

Our three transparent pricing packages are designed to give you the widest possible access to high-quality legal advice, whatever the size and nature of your business:

City

Straightforward access to senior solicitors at a competitive rate.

An affordable solution for businesses needing one-off legal support. Receive ‘City’ partner-level expertise at a fraction of ‘City’ prices.

Enterprise

Have legal peace of mind for £189 per month with additional support from £99 per hour.

A monthly subscription legal support package specifically designed for start-ups and smaller businesses.

On-Demand

For businesses requiring 60+ hours of support a year, with prices equivalent to £99 per hour.

Fully account managed quarterly subscription service for businesses with more complex legal needs.

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