Growth shares – the basics
What are growth shares?
Growth shares enable a new shareholder (whether an employee or not) to participate in the future growth of a company but do not confer an interest in the company’s existing assets. Share incentives structured in this way are generally far more affordable for the employee than shares which confer an interest in the historic assets and profits of the company.
When are they used?
They are often used where it is desirable to incentivise an employee by enabling them to participate in future profits but where HMRC approved arrangements are not appropriate. This may be because ordinary shares would be too expensive for employees to acquire outright, or the business or the intended recipient does not qualify for HMRC approved share schemes. They are flexible in that the employer can be selective about which employees it wishes to offer growth shares.
How do they work?
The employee will be treated as being in receipt of taxable and NIC-able income to the extent that the market value of the shares being issued exceeds the subscription price. It might be argued that the value of the growth shares on issue is very small but HMRC often counters nowadays that growth shares have a “hope” value which needs to be factored into valuation. It is therefore essential that a robust valuation of the new shares is obtained for tax purposes.There are many potential variants of growth shares, including future hurdle shares, flowering shares and waterfall shares. These are beyond the scope of this document but all have implications for the new and existing shareholders.
Steps in the process of issuing growth shares
- The rights attaching to any new shares need to be considered by the Board and agreed with the employee.
- An independent valuation of the shares to be issued should be obtained.
- The new class of shares can then be created. This will usually involve amendments to the company’s existing articles of association, which will need to be ratified by the Board of directors and existing shareholders.
- Various Companies House filings will be required as a consequence of the share issue and HMRC filings and elections will also need to be considered.
This is a very basic outline of how growth shares work. In practice, there will be many detailed issues to consider. Please contact us for more information.