Growth shares explained
Growth shares: what they are, how to use them and who can have them.
In this guide, we cover everything there is to know about growth shares.
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Written by Alan Clarke
Alan Clarke is a Senior Equity Consultant at Vestd.
Page last updated: 15 January 2025
Contents
- What are growth shares?
- How do growth shares work?
- Who can have growth shares?
- The benefit of growth shares
- When to use growth shares
- How are growth shares taxed?
- Growth share dividends
- Growth shares vs other share incentives
- Growth shares and EIS
- Growth shares and succession planning
- How to set up a growth share scheme
- Growth share schemes on Vestd
- FAQs
What are growth shares?
Growth shares allow people to share in the value they help to create above a certain threshold. That threshold is called the hurdle rate. Only when the company’s share price exceeds that hurdle, are the growth shares worth anything.
Growth shares are a great way to reward somebody for the value they add to the business after they join, rather than benefit from its existing value. So, there’s a strong incentive for them to grow the business.
Growth shares are also more tax-efficient than other means, which we’ll come onto.
How do growth shares work?
Growth shares are a special class of ordinary shares with limited rights, issued upfront with a hurdle.
In plain English? They are shares issued at a hurdle rate that’s usually 10-40% higher than the company's current share price.
Growth share hurdle
With growth shares, recipients only share in the capital growth of the business on anything above the hurdle rate.
The hurdle rate is the price per share that needs to be hit before the beneficiary gets full economic rights to their growth shares. Before that, the shares have no real market value.
The hurdle rate itself is based on the current share price (as determined by a professional valuation) plus a small premium.
Let’s look at an example of growth shares in action.
Example
You’re the CEO. You’ve just recruited a new Head of Sales and want to give them growth shares.
The shares are currently worth £1. So the hurdle rate would be £1 plus a small premium, let’s say 20%, so £1.20. Their growth shares aren’t worth anything until the share price rises above £1.20.
Five years later, the company is sold for £5 per share. In this scenario, your Head of Sales’ growth shares are worth £3.80 per share.
You can also set conditions to meet before somebody gets the full rights to their growth shares.
Who can have growth shares?
Companies can issue growth shares to anyone, including folks not based in the UK. But just to give you an idea, that could be:
- Part-time and full-time employees
- Directors and non-executive directors
- Senior executives
- Accountants
- Advisors
- Consultants
- Contractors
- Freelancers
- Lawyers
In the UK, there are generally no income tax implications for the recipient, as growth shares are worthless at the time of issue. Tax implications will differ in non-UK jurisdictions. If in doubt, seek professional advice.
Growth share benefits
There are many advantages to using growth shares, for the employer and employee. Let's break it down.
The benefits of growth shares for companies
1. Reward practically anybody
There are no eligibility criteria for growth shares so anybody can have them, including employees, directors, NEDs, and non-employees such as advisors, contractors and freelancers based in or even outside the UK.
2. Super flexible
Some share schemes have limitations and qualifying criteria. Growth shares are far more flexible.
Companies can even issue growth shares along with, or as an alternative to, schemes like Enterprise Management Incentives (EMIs), for instance. While EMI is super tax-friendly it has strict criteria.
And unlike EMI, which is only available to UK-based employees and limited to companies with fewer than 250 people, there are no restrictions on who can have growth shares, company size or industry.
3. Attract and incentivise top talent
Growth shares are a great way to bring new talent on board and motivate them to help grow the business as much as possible because the value of their reward is dependent on the business' growth.
4. Protect existing shareholders
Issuing growth shares creates new shares and dilutes the cap table, causing a shift in shareholders' shareholdings. However, shareholders can rest assured that their equity value below the hurdle rate remains unaffected, protecting their stake in the company’s value.
5. Issue with or without voting rights and rights to dividends
Growth shares can come with full voting rights or none at all. Most companies don’t attach voting rights to their growth shares, but it’s a possibility. Dividends are also a possibility.
6. Conditional
Growth shares can be conditional, which simply means they’re issued under certain conditions that the recipient has to meet. Usually, time or performance-based milestones.
If the recipient falls short of those expectations, they won’t be able to acquire their shares, or at least not all of them. The company has the power to defer the growth shares if necessary (effectively making them worthless).
Conditional growth shares offer a greater level of protection for both parties. Download our free conditional equity guide for examples.
7. Alignment and retention
Studies show that people with even a small piece of the pie are more motivated to succeed and inclined to stick around for longer. It's called the Ownership Effect and it's pretty powerful.
The benefits of growth shares for employees
Or all growth share recipients for that matter!
1. Dividends (potentially)
Recipients may receive dividends once their growth shares are unconditional, if the company allows, which is a nice perk but very much a commercial decision unique to the company.
2. More affordable than ordinary shares
With growth shares, an individual can purchase shares in the company without having to pay the full market value of ordinary shares. And they’ll only have to pay nominal value for their growth shares, which is peanuts in comparison.
3. Tax-efficient
Ordinary shares are also taxed heavily. Whereas growth shares have an advantage. As they’re worthless at the time of issue, whoever receives them will face no immediate tax implications - only when they go to sell them.
4. Real shares upfront
Unlike share options, which give recipients the right (but not the obligation) to purchase shares in the company in the future, growth shares are real shares issued upfront. Some people may find this more appealing.
When to use growth shares
For business owners, growth shares are a way to:
- Issue equity to UK-based employees and other key people in a tax-efficient manner.
- Issue equity to individuals overseas.
- Incentivise senior or more experienced members of staff to drive company growth.
- Start transferring shares as part of a business succession plan.
How are growth shares taxed?
With some schemes like EMI, the cost of setting up the scheme can be offset against Corporation Tax. The same can’t be said for growth shares, but they’re still more tax-efficient than ordinary shares.
Growth shares and Income Tax
In the UK, recipients don’t generally pay income tax when they receive their growth shares so long as the hurdle rate is set at 10-40% above the market value. This article goes into more detail.
Growth shares and NIC
As there’s no income tax to pay upfront, employers don’t have to pay PAYE or make National Insurance Contributions either.
Growth shares and Capital Gains Tax
When the recipient sells their growth shares, Capital Gains Tax (CGT) may be payable on any growth in the value of their shares. Typically, 10-24% CGT but only after they’ve exceeded their annual tax-free allowance.
Growth shares and BADR
Growth shares can qualify for Business Asset Disposal Relief in some circumstances (emphasis on the 'some'). It’s quite complex.
The person with growth shares claiming BADR must have at least 5% of both the shares and voting rights, and be entitled to at least 5% of either profits on winding up or proceeds of an exit.
It’s quite nuanced so do check out this article.
The table below illustrates how growth shares compare with other schemes tax-wise for a UK-based employee:
For more information on how share options are taxed, in particular unapproved options, see this article. As with anything and everything relating to tax, if ever in doubt, seek professional advice.
Growth share dividends
Growth shares can have full rights to dividends but it’s an area to tread carefully. It’s also very much a commercial decision dependent on that company’s specific circumstances. Learn more.
Growth shares vs other share incentives
There’s more than one way to give key people skin in the game! Below we compare other popular methods UK companies use to share equity with their teams.
Growth shares vs ordinary shares
Ordinary shares are what most people think of when they think of shares. Usually (but not always) ordinary shares give the holder of each share the same rights to dividends, capital and voting in the company.
The main drawbacks to using ordinary shares are that they're unconditional and often taxed heavily. In that respect, growth shares offer existing shareholders more protection and a tax advantage.
Growth shares vs share options
What's the difference?
Simply put, share options give someone the right to buy shares in the company in the future at a pre-agreed price. Whereas, growth shares are actual shares. So once issued, recipients become shareholders immediately (though the shares themselves aren't that valuable yet).
However! Both share option schemes and growth share schemes can be conditional - which means that when these pivotal moments occur, and under what conditions, can be determined by the employer. Share options tend to vest over time but growth shares can too.
Unlike growth shares, unexercised share options can lapse, so there’s no need for the company to buy the shares back, which makes things a bit less complicated in the event someone leaves.
Both growth shares and share options ‘get the job done’ in mobilising and incentivising teams - just in different ways. Let's look at growth shares versus three option schemes: EMI, CSOP and unapproved options.
Growth shares vs EMI
EMI is the most tax-friendly share option scheme in the UK by far. EMI options by their very nature differ from growth shares, but both can be used alongside each other to reward teams.
EMI offers greater tax advantages but is far less flexible than a growth share scheme, which can be used to reward people other than employees.
As wonderful as they are, there are also other restrictions with EMIs. But unlike growth shares, with EMI, companies can usually offset costs against corporation tax by claiming a deduction for the full amount of an employee's option gains.
A valuation approved by HMRC is a no-brainer for EMI as it reduces the risk of HMRC ever challenging it in the future (in particular, the AMV and UMV). Getting a valuation for a growth share scheme is wise too.
Growth shares vs CSOP
Company Share Option Plans (CSOPs) are the next best thing to EMI in terms of tax efficiency. Often companies explore CSOPs when they’ve exhausted the limits of EMI.
CSOP is another tax-savvy share option scheme for UK companies. Companies can also offset costs against corporation tax, the same as EMI, in most cases. And again, it's vital that HMRC gives the valuation the green light.
Growth shares vs unapproved options
Unapproved options are not as tax-efficient as EMI or CSOP, or growth shares for that matter, but they are even more flexible. Unapproved options are share options with broad eligibility criteria and no limits. It’s one of the easiest schemes to set up, with no approval needed from HMRC.
That’s the long and short of it, but you can quickly compare them all using the chart below (click to expand):
Growth shares and EIS
There's a misconception that growth shares can’t be used alongside the Enterprise Investment Scheme (EIS).
But it’s actually fairly simple to protect your EIS eligibility when using growth shares - the EIS shares just can’t carry any preferential rights.
We've designed the Vestd Articles of Association so that any ordinary shares issued under EIS do not get a preference regarding dividends or following an exit. So customers don’t need to worry about this one.
Growth shares and succession planning
Business succession planning or exit planning is something owners need to think about (and the earlier, the better).
It’s not unheard of for founders to use growth shares as part of a gradual transfer of ownership. They may issue growth shares to senior members of the team with a future management buyout (MBO) in mind.
How to set up a growth share scheme
Here are the initial steps to take to set up a growth share scheme:
- Get permission from existing shareholders to issue growth shares.
- Amend the company’s Articles of Association (if they don’t already contain clauses relating to growth shares).
- Create the growth share classes (voting or non-voting).
- Get a hurdle valuation and use that to set the hurdle rate.
- Discuss and settle on any conditions the recipient has to meet.
- Create a growth share agreement for recipients to accept.
- Once accepted, issue the growth shares.
If you’re setting up a share scheme, you could turn to an accountant or a specialist and ask them (pay thousands of pounds for the privilege) and still have to handle a mountain of paperwork. Or…
You could join Vestd and issue growth shares with ease...
Growth share schemes on Vestd
We’ll help you get set up, adopt the Vestd Articles (which are primed for growth shares) and create your voting and non-voting growth share classes for you.
Your team can accept agreements electronically and access personalised dashboards to monitor the value of their growth shares over time. If they can see their shares in real-time, it makes a huge difference to their motivation and mindset!
Make the most of our five-star rated support and fully-guided service. Set up a growth share scheme on Vestd today!
Frequently asked questions
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Can any company issue growth shares?
Pretty much. There are no specific limits or statutory requirements a company must follow.
Growth shares naturally lend themselves to unlisted, high-growth companies that:
- Are not otherwise eligible for government-backed, tax-advantaged share option schemes, or have reached the limits of those schemes.
- Want to provide a tax-efficient way for employees to participate in any future increase in value.
- Want to reward non-employees and individuals not based in the UK.
- Want to lessen the dilutive impact on existing shareholders’ equity value by protecting the company’s existing value.
- Potentially want to transfer ownership as part of a gradual management buyout (MBO).
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Are there any disadvantages to using growth shares?
If you’re a business owner, here are three things that you should know before choosing growth shares:
1. You'll need a tax valuation each time you issue new growth shares
Like with options, you'll need a tax valuation every time you issue growth shares. Only then will you know what hurdle rate to set. The trouble is that these can be expensive.
Unless you’re a Vestd customer on a share scheme plan, in which case, our experts will handle this as part of your subscription.
2. But you can’t ask HMRC for approval
Unlike an EMI valuation, a hurdle valuation can’t be approved by HMRC before you issue the shares.
That means HMRC might decide your valuation was too low when they come to review it, leaving your growth shareholders paying Income Tax on the growth shares they’ve received (undoing one of their big benefits).
With this in mind, you should always apply a premium of 10-40% to your shares’ market value when you come to set your hurdle rate to make sure HMRC doesn’t end up deciding that these shares had been undervalued at issue.
But now, armed with this knowledge, you know just what to do, so that shouldn't be a problem!
3. You'll need to amend your Articles of Association
Before issuing growth shares, you need to make sure your AoA are growth share friendly. You ask a qualified professional or specialist firm to do this for you, or save some money and simply adopt the Vestd Articles.
The Vestd Articles allow for a more complex share structure and detail extensive rights not set out in the Model Articles. For example, the Vestd Articles contain specific growth share clauses.
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Do I need a valuation to issue growth shares?
Yes. While it’s not a statutory requirement, getting a valuation is a wise move.
The valuation will help you determine what hurdle rate to set for the growth shares, which is based on the company’s current share price plus a small premium.
That added premium is important because it reduces the risk of HMRC deciding that the shares had been undervalued when issued. Learn more.
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Do I need to amend my company’s Articles of Association to use growth shares?
Yes, if you adopted the Companies Act 2006 Model Articles when you first set up the company, and no amendments have been made since then.
The Vestd Articles of Association are suitable for growth shares. In the Vestd Articles, growth shares are called V shares. Many customers adopt the Vestd Articles (at no extra cost) to streamline the process.
Alternatively, your lawyer can draft amendments to your existing AoA to facilitate the use of growth shares, though this could cost thousands of pounds.
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What conditions can I set for growth shares?
Time-based incremental vesting is the gold standard. Tenure-based milestones are clear, unambiguous and hard to contest. E.g. Be part of the team over a certain period or at a certain date.
Growth shares can also have performance or output-related conditions attached to them. E.g. Generate £x in sales. Bolting too many conditions to your growth share scheme can have an adverse effect on motivation.
Any goals you set ought to incentivise your team, not deter them. Our free guide to conditional equity contains top tips and examples.
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Do growth shares vest?
They can, and do more often than not. Once growth shares vest, they can’t be deferred (cancelled), in other words, the recipient gets to keep them so long as they fulfil the conditions of the share agreement.
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What happens to an employee’s growth shares if they leave?
It depends on the agreement. Growth shares are often issued under the condition that the recipient remains employed by the company or provides services. Should that change, the company may be able to defer (cancel) all or some of the unvested growth shares. Learn more.
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What are the alternatives to growth shares?
It depends on the business and the objective. Broadly speaking, in terms of flexibility, unapproved options are a good alternative. But for tax efficiency, EMI options or CSOP options are excellent. However, the criteria for those are stricter.
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