Hurdle Shares
Key facts: Hurdle shares solicitors
- Hurdle shares are a special share class which allow employees to benefit only from growth in the value of the company above a ‘hurdle’ exceeding the current value of the business. They’re usually part of a growth share scheme to incentivise employees.
- These shares enable employees to own an equity share in the company and are typically purchased for a low initial value and, as such, attract little or no tax payment.
- Like other unapproved share schemes, hurdle shares provide considerable flexibility to employers as not only can they set specific conditions on their use (such as forfeiture if the employee leaves the business), they provide a way of rewarding hard work and loyalty without offering increasing salaries, thereby helping to control costs.
- When considering share incentive schemes, there are several routes available, including tax-advantaged ‘approved’ schemes and unapproved share options. Our team of share scheme solicitors will explain the implications, advantages, and risks of each, including EMI options, growth shares, flowering shares and shadow/phantom shares. We can also recommend the most suitable options based on your location, business type, stage of growth, and objectives.
What we do: Hurdle shares legal advice
Hurdle shares are typically offered to incentivise key employees in return for their loyalty and hard work in assisting the growth of a business. These non-approved HMRC share option arrangements provide considerable flexibility and tax advantages for employee and employer. Hurdle shares enable employees to become shareholders at little cost, and allow them to realise their value once the growth threshold has been achieved.
Our hurdle shares solicitors can advise on a range of share option schemes. Typically, we can help you with:
- Advising on the most suitable plan for your commercial goals
- Valuing the shares
- Advising on a future hurdle amount
- How you can combine hurdle shares with other types of shares
In addition to hurdle share advice, we can provide guidance in relation to other share schemes that may be more suitable for your business:
- EMI options
- Other HMRC approved option schemes
- Unapproved option schemes
- Phantom shares
- Flowering shares
- Growth shares
About hurdle share schemes
Under hurdle share scheme arrangements employees benefit from the uplift in value once the set growth has been achieved, for example, if a business is currently valued at £20million, a class of share for growth above £25million might be set as ‘hurdle shares’. For this reason, hurdle shares are popular with companies with ambitious growth targets.
As a non-approved HMRC share scheme, hurdle shares offer considerable flexibility and control in a number of ways:
- Existing shareholder protection – as the employer is able to set the ‘hurdle’ (or threshold) at which the share benefit can be realised, they are afforded greater control over growth targets and shareholding. As such, current employees will not have their stake diluted immediately – thereby protecting key staff and founding members.
- Employer financial protection – As the employee is buying their shares at the market rate (typically low given the early stage of the company), they are incentivised to work hard and remain faithful to the business. As a result, there is no requirement to incentivise through salary payments, only once the hurdle target has been met.
- Additional conditions – Employers can make hurdle shares subject to specific conditions, such as forfeiture if the employee leaves the business.
Due to the various types of share incentives available, including HMRC approved and unapproved 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
- On receipt of the hurdle shares, income tax is typically not payable by the employee as the full market value is being paid.
- On disposal, Capital Gains Tax (CGT) is typically payable – this may be reduced (from 20% or 40%) to 10% if the employee is eligible for entrepreneur tax relief. In addition, hurdle shareholders may benefit from the Capital Gains Tax annual allowance.
If you need an introduction to share schemes and which might be best for your business, don’t forget to read our advice What are employee share schemes and how do they work?
Who we help: High-growth businesses, start-ups, SMEs and large businesses
We help start-ups, SMEs and high-growth businesses, as well as investors and entrepreneurs. Hurdle shares are most suitable for companies with ambitious growth plans and an exit strategy. Start-ups and high-growth companies are a major focus for our firm so we are highly experienced in guiding them from formation through to successful exit, and we appreciate how incentivising employees along the way can aid this ultimate goal.
Why choose our share option solicitors? Our experience
We’re a modern law firm with a difference. Our innovative remote operating model means that you can access expert City-grade legal advice from partner-level solicitors at a fraction of the cost of traditional law firms. Our solicitors have all been recruited from top 100 UK law firms or large international businesses. Find out more about our corporate lawyers here:
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