From an existing shareholder perspective, growth shares help to manage any dilution of existing value and motivate key employees to generate future growth for the benefit of growth shareholders and existing shareholders alike. They therefore play a key role in aligning shareholder and key employee interests.
Growth shares also offer potentially significant tax savings to both employees and the employer. Due to the lack of economic entitlements when the growth shares are actually acquired, their full unrestricted market value should be relatively low, reflecting the fact that when they are acquired they have “hope value” only.
The cost (or tax cost) to employees of acquiring their growth shares is therefore made more affordable and the downside risk to employees is also reduced.
Growth shares are commercially flexible and can therefore be made forfeitable on employees leaving, with relevant restrictions or rights applying in relation to votes, dividends and other shareholding rights. Performance or time based vesting triggers can also be added.
If employees pay full market value for their growth shares there should be no income tax or National Insurance contributions liabilities on either the acquisition of the shares or on their growth in value. Growth shares acquired at a discount can still give rise to such liabilities but on a significantly reduced value when compared to “full value” shares.
The more beneficial rates of capital gains tax (between 0%-20%) should then apply to any future growth in value of the shares. This compares very favourably with unapproved share options, cash bonuses and phantom share options.
Growth shares can be used effectively as part of an Enterprise Management Incentive (“EMI”) option to combine the commercial benefits of growth shares with the enhanced tax breaks offered by EMI.