Growth Share schemes provides an efficient way for a company to incentivise key employees by allowing them to benefit in the growth in value of a business but without prejudicing the value achieved by the founding shareholders.
Essentially, a Growth Share scheme creates a new class of share, which allows an employee to participate in any future growth of the business. The company value prior to the shares being issued is preserved by the existing shareholders (generally the founder shareholders) and employees entering into the Growth Share scheme only benefit from future value growth from the date the shares are issued. By their very nature Growth Shares have a nil value when they are first issued.
Growth share schemes – an example
A company is valued at £2million when the Growth Share scheme is initiated. The shares would have a restriction attached to them that if the business was sold, that the employees who opted into the scheme would only share in any proceeds that exceed the £2million.
In the example above, the £2million is the “hurdle” and it is possible to set the hurdle higher than the valuation. The particular facts and circumstances of the business, its founders and its staff must be looked at. There is no standard Growth Share model.
The Growth Shares issued to employees are often non-dividend, non-voting and capable of being bought back. Appropriate restrictions are set out in the ‘Articles of Association‘ of the company at the time the Growth Shares are issued.
It is extremely important that a valuation of the company is undertaken by an accountant before the shares are issued, and a record of this must be kept.
Tax considerations
Properly issued Growth Shares are free of tax liability on issue, as they have no value when they are allotted to employees. This would not be the case if a business were to sell ordinary shares to its employees.
When a Growth Share scheme is in place, the people with these type of shares will pay Capital Gains Tax (CGT) but may be able to benefit from Entrepreneurs’ Relief depending on their particular circumstances.
Nelsons does not provide tax advice but have a number of local accountants which we work with on these types of schemes.
Other considerations
Other things to consider include:
- If an employee has Growth Shares and leaves the business then the documentation can provide the company with protection to enable a buyback of the shares.
- The number of Growth Shares issued or made available to employees would need to be agreed in advance by the existing shareholders. There is no maximum legal limit on the amount of shares made available.
- The implementation of the Growth Shares scheme for employees would be deemed as ‘employment related securities’, which would necessitate an HMRC return and tax advice should always be sought.
Growth share schemes – how can Nelsons help?
Alice Rees is a Partner at Nelsons, specialising in corporate services.
Our corporate services team combined with the wider specialisms and expertise within the firm, make us the perfect choice for any business looking to implement a Growth Share scheme. We work closely with our client’s accountants and tax advisers to ensure that all angles are considered.
For more information on the subjects discussed above, please call Alice or another member of the team in Derby, Leicester or Nottingham on 0800 024 1976 or contact us via our online form.