Growth Shares

Posted on December 01, 2015

Trees with different shares of leaves

During this time of increased economic activity, when companies are more optimistic about the growth potential of their business, RM2 is seeing an increased interest in Growth Shares.

Growth Shares are a special class of shares which enable the employees to maximise their earning potential over a set period of time linked to the growth in share price. Thus, the employee has a stake in the employing company from the beginning of the growth period. The employee can afford to buy into the company at a share price that is based on the lowest possible value and any subsequent gains will receive capital gains tax treatment (at 28% with the possibility of Entrepreneur’s Relief at 10%) rather than income tax treatment (at 45% for higher earners).

HMRC has released a review into how Growth Shares are being used currently in business (which you can review here). We have summarised the findings in two concise tables for you to consider:

  1. Growth Shares: Are they right for my Company?
  2. Growth Shares V. EMIs

Key Features

Some points to note are that Growth Shares:

  • Can be highly motivating to employees as the capital growth of these shares can exceed the growth which would be available to an external investor who is not an employee. 
  • Have been shown to attract, retain and incentivise key senior employees who will be motivated to grow the business from today’s value to a value at a certain point in time.
  • Encourage employees to put “their skin in the game” by agreeing to pay income tax on full market value (albeit this is at low value) of Growth Shares with the risk of loss of these shares if employment ceases prior to the exit event or if the exit event is not achieved.
  • Achieve emotional attachment to the employing company as employees are also shareholders.
  • Provide cash savings for the company as there is no initial outlay of cash in the form of a high salary to attract the key employees.
  • Provide “protected incentivisation” for the company as the business only loses some of its equity if the value grows successfully, and the value of the growth does not attract employer NICs. 
  • Will require a change in the Articles of Association to create a new class of growth shares which if desired can have no voting rights attached.

Growth Shares are most appropriate to high growth companies (15-20% p.a.) looking for an exit plan in the short-medium term; as well as private equity firms and management buy-outs. Companies with fewer than 250 staff and less than £10m per year turnover may find an approved scheme such as an EMI to be more appropriate and less costly to set up.

There is no need to obtain HMRC approval for creating Growth Shares or indeed their valuation.  However, the implementation is quite complex and shall require close work with your advisers.

 
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