Growth shares—practical examples and comparisons with options
Growth shares—practical examples and comparisons with options

The following Share Incentives practice note provides comprehensive and up to date legal information covering:

  • Growth shares—practical examples and comparisons with options
  • What are growth shares?
  • Example—impact of growth shares on fully diluted share capital
  • Valuation of growth shares
  • Tax treatment on acquisition of the growth shares
  • Example—treatment of growth shares on an exit, compared to options
  • Tax treatment on sale of the growth shares
  • Example—tax treatment on sale of growth shares
  • Additional considerations

What are growth shares?

Growth shares, also known as value shares or hurdle shares, are a specially constituted class of shares which have restricted rights. These rights are designed to allow the growth shareholder to only participate in post-acquisition increases in the value of the company on a capital return to shareholders once a pre-determined value hurdle has been achieved. They therefore tend to have a similar economic effect to an option with a market value exercise price.

For more details on key features of growth shares and the circumstances in which they may be an appropriate structure for a company to incentivise its employees, see Practice Note: Growth shares (value shares).

In order to appreciate the returns and the tax treatment applicable to growth shares, it is interesting to compare growth shares with enterprise management incentives (EMI) options and unapproved options. For general information to EMI options, see Practice Note: Introduction to enterprise management incentives schemes. For background on unapproved options, see Practice Note: Unapproved share options.

Example—impact of growth shares on fully diluted share capital

This example assumes that a company has an issued share capital of 1,000,000 ordinary shares with a market value of £1.45 each, with the result that the company has a market capitalisation of £1,450,000.

If the company decides to issue a number of growth shares to one or more employees which will be

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