At Vestd, we spend a lot of time talking to business owners about different types of shares. Quite often it’s not as simple as ‘this type of share scheme is the “best” for your business’ because many different factors come into play.
So we’ve created an unapproved options vs growth shares calculator to help you figure out the difference in net benefit, as that’s a good place to start.
Step 1: Valuation
You start with an estimate of the business value today and assume a future exit valuation (you are allowed to dream at this stage, but more helpful to be objective).
Step 2: Current shares
Enter the total number of shares you’ve issued, and your hope premium. The ‘hope premium’ is the marginal uplift on your valuation of shares at the time of issue. This is to make sure HMRC are comfortable that no tangible value has been transferred without being taxed (typically 5–20%). The calculator will then quickly work out your current share price and what the hurdle price would be for growth shares.
Step 3: Current shareholders
Just pop in their name and percentage of ownership. The calculator will tell you what that means in terms of number of shares.
Step 4: Future shareholders
Same details as existing shareholders but for your lucky new ones.
Step 5: Out-turn on exit
This is the magic bit. From the information you’ve added the calculator has worked out the net benefit for each recipient for both EMI and for growth shares. So you can easily see which one works out best for your shareholders.
If you’re ready, go ahead and get started comparing growth shares and unapproved options. But if you want a bit more information first, keep on reading.
Unapproved options are pretty simple. They are also flexible and can be given to employees, contractors, advisors, consultants, you get the picture. Another factor adding to the simplicity is that unapproved options don’t require any formal valuation or notification to HMRC when the options are set up (unlike EMI), although they do need to be included in an annual report to HMRC via ERS , if they have been given to employees or directors.
The big disadvantage with unapproved options is that there is no tax benefit for the recipient. The recipient is liable for income tax on the difference between the exercise price and the market value of the shares at the time. An employee may also be liable to pay national insurance on this, if the shares are readily convertible to cash at the point of exercise (eg in a sale scenario).
Growth shares only share in the capital growth of the business from the point that they are issued. For example, if they are issued at a hurdle of £1 per share, they will only share in any eventual net sale proceeds that are over and above £1 per share. This means that existing shareholders are only value diluted for growth from that point, rather than the existing worth of the company.
So, recipients of growth shares don’t have to pay income tax on exercise, only capital gains tax on sale (which is the same for unapproved options). This makes them pretty tax efficient for non-employees and, if you’ve previously used EMI options for employees, tax efficient for them too. They can be issued immediately and (again, the same for unapproved options) it’s possible to set conditionality for the shares.
Why, then, would you choose unapproved options over growth shares when growth shares are more tax efficient? Well, unapproved options are simpler, you don’t need to adopt new articles of association and they are much more commonly understood. And, if the business has limited growth potential, say less that 2 or 3 times current, the unapproved may actually be more efficient.
Don’t miss out on setting up the perfect share scheme for your team. Start right by using the calculator