Growth shares are share-based incentives that allow selected individuals to participate in the value of a company above a valuation threshold. Distinct from ordinary shares, growth shares are a different class of shares created to benefit from the capital value above the valuation threshold.<\/p>\n
Growth shares typically don\u2019t have rights to dividends or voting but are flexible and tax-efficient. They\u2019re ideal for companies aiming for an exit, e.g. on the sale of the company or an IPO, so they\u2019re also called exit-based incentives.<\/p>\n
Growth shares work by establishing a threshold (i.e. \u2018\u2019hurdle\u2019\u2019) that is specified at the start to encourage the future growth of the company. When growth shares are issued at a \u2018hurdle price\u2019, it is often slightly in excess of the value of the company at that time.<\/p>\n
When the company is sold, the holders of growth shares benefit from the growth in the value of the company above the \u201churdle price\u201d. At the same time, the existing shareholders can keep the existing value of the company.<\/p>\n
For example, a company is worth \u00a310 million at the date of issuing its growth shares which are valued at \u00a31,000. It sets the hurdle at \u00a312 million, meaning recipients can only benefit from the growth above \u00a312 million.<\/p>\n
A senior executive of this company pays the full value of \u00a31,000 to participate in the plan. In his plan document, he will be given 1% of the company value above the hurdle when the company is sold. Some years later, the company is sold for \u00a320 million. The value of the growth shares for this employee is \u00a380,000 (\u00a320,000,000 – \u00a312,000,000) x 1%. The gain for him is \u00a379,000 (80,000 – \u00a31,000) and capital gains tax (CGT) may be payable.<\/p>\n
When they receive their growth shares<\/strong>, employees don\u2019t need to pay income tax or employee NIC if they pay full market value for the shares. But, if the employees receive the growth shares at a discount, they\u2019ll need to pay income tax and possibly NICs on the amount of the discount.<\/p>\n When they sell their growth shares<\/strong>, CGT may be payable on any value growth. CGT is more favourable, especially for higher-rate income taxpayers. No corporation tax relief<\/u><\/a> will be available to the employer for any growth in the value of the employee\u2019s shares.<\/p>\n Advantages:<\/p>\n Disadvantages:<\/p>\n It is common for growth shares to be forfeited if the participant ceases employment other than in certain \u2018good leaver\u2019 situations such as redundancy, retirement, injury and death.<\/p>\n Due to high flexibility, employers can set their own eligibility criteria for acquiring growth shares. Growth shares can be awarded to<\/p>\n Growth shares are suitable for companies that<\/p>\n We provide businesses of all sizes with an all-in-one equity compensation management solution<\/a> at J.P. Morgan Workplace Solutions. We handle all the equity award administration so you\u2019ve nothing to worry about. Get in touch to find out how we can assist with equity design and management.<\/p>\nPros & Cons of growth shares<\/b><\/h2>\n
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What happens if a participant quits?<\/b><\/h2>\n
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