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Growth Shares in 10 Steps

Growth Shares in 10 Steps

Growth Shares in 10 Steps

Growth shares are a unique type of company shares that are reserved for employees. These shares allow employees to share in the company’s profits once it reaches a certain value.

Here are ten simple steps for company owners to follow when deciding to offer growth shares to their employees.

1. Decide How Many Shares

Start by figuring out how many growth shares you want to issue. Consider what percentage of the company’s total shares these growth shares will represent and how this will change if more shares are issued in the future.

Bear in mind that growth shares can be granted under share options, where employees have options to buy shares in the future, or awards, where shares are transferred to staff immediately.

2. Set the Price

Determine the price employees will pay for a growth share. Usually, this price matches the market value of the share to avoid extra taxes. However, it might differ if the shares are part of a specific plan.

3. Establish a Threshold

Set a target value that the company must reach before growth shareholders can cash in from the sale of the shares. Once this threshold is reached, growth shareholders become eligible to share in any proceeds from a company exit.

Make sure everyone knows this target and decide who has the power to adjust it if needed. It’s vital to establish who holds the authority to adjust the threshold price, how adjustments will be made, and whether shareholder consent is required for any modifications.

4. Define Rights

Decide what rights growth shareholders will have, like getting a share of the profits or voting in company decisions. Typically, they only get these rights when the company is sold or goes public.

Defining the conditions triggering such events is crucial, along with outlining how they affect the threshold price. In the event of a liquidity event, ordinary shareholders usually receive capital up to the threshold price, with any surplus distributed among ordinary and growth shareholders based on their respective holdings. Growth shareholders typically do not receive dividends, although some argue for dividend rights to bolster growth shares against challenges from tax authorities. If dividend rights are granted, they may differ from those of ordinary shares, potentially with reduced or delayed payments.

5. Protect Against Dilution

Think about how to protect the value of existing shares if more shares are issued in the future, which could reduce their worth.

Growth shareholders will generally have no such protections, meaning the value the original growth shareholders were entitled to on exit may decrease if more growth or ordinary shares are issued.

6. Specify Vesting Conditions

Determine when employees can fully own their growth shares, often based on meeting certain performance goals. This can be in addition to, or an alternative of, the “Threshold” described above.

Clarify whether the board holds the authority to adjust these conditions for future growth share issuances.

7. Plan for Leaving

Determine the procedure for growth shareholders to sell their shares, particularly in scenarios where they are no longer employees, directors, consultants or in the event of bankruptcy.

“Leaver” provisions are often included to force employees to sell their shares if they leave the business. If they are “bad leavers” (for instance, when dismissed for gross misconducts), the price can be as little as the nominal value of each share. If they are “good leavers” (for example, they leave because of illness), the price can be the “fair market value” (which will need to be defined carefully in the documentation).

8. Consider Transfer Rules

Decide if growth shareholders can sell their shares or if there are restrictions, like needing to offer them to existing shareholders first.

Commonly, growth shareholders will not be granted with pre-emption rights on transfer or issue of other classes of shares.

9. Understand Drag Rights

Drag rights allow the majority shareholders who wish to sell their shares to force the growth shareholders to also sell their shares.

Figure out how these rights affect the value and sale of growth shares, depending on whether the threshold is met.

10. Prepare for IPO

Decide what happens to growth shares if the company goes public, including whether they convert to ordinary shares and if there’s a waiting period for selling them.

Speak to our Corporate and Commercial Specialists

Issuing growth shares can motivate employees and help your company grow. Consider these steps carefully, and seek legal advice if needed to ensure everything is handled properly. Also, don’t forget to get tax advice before issuing growth shares.

If you would like to discuss any issue relating to this blog, please do not hesitate to contact a member of the Corporate and Commercial Team on 0330 175 7609 or contact us via the enquiry form at the top of our Corporate and Commercial page.