Exit Planning with Growth Shares

If you’re a UK business owner looking to retain top talent, reward key contributors, and handle equity effectively without diluting current shareholders, growth shares offer a powerful solution. For the right businesses, this approach can be highly tax efficient.

But it does raise some important new considerations when it comes to your future exit plans. In this blog, I’ll break these down, covering topics like crystallisation terms, drag-along rights, and BADR eligibility.

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One of the key characteristics of growth shares is that they can be structured as “exit-only”. In other words, they only become valuable during a liquidity event, such as a trade sale, an IPO (going public), a funding round that triggers a buyback, or a Management Buyout.

This makes growth shares particularly appealing for start ups and scale-ups aiming for future high-value exits, where they do not want the growth shareholders to hold shares through the growth phase.

Alternatively, the founder may prefer growth shares to crystallise sooner, enabling the key employee to become a shareholder during the growth phase. This may result in preferential tax treatment, depending on the scenario.

Crystallisation of Growth Shares

Growth shares should have clear, legally documented terms specifying how and when they convert into value and trigger capital gains or losses. This is known as crystallisation.

This could be a cash payment on sale, conversion into ordinary shares, or participation in proceeds above the hurdle (e.g. pro rata from £10 million onwards).

Here, it is crucial to provide clarity to manage employee expectations and ensure positive tax outcomes.

Drag-Along & Tag-Along Rights

Drag-along clauses allow majority shareholders to compel minority shareholders to sell in the event of an acquisition.

Tag-along rights protect minority shareholders by allowing them to participate in any such sale.

It is essential that growth share agreements clearly define whether holders are subject to drag-along rights or can tag along in an exit. They must also state whether and how growth shares convert after these rights are triggered.

Accelerated Vesting

In the event of a business sale, you may choose to accelerate vesting for certain team members. These are the time-based requirements an employee must meet before earning full rights to growth shares.

This can be a full or partial acceleration and including it in your scheme enables you to reward loyalty without over-rewarding underperforming team members.

Maintaining BADR Eligibility

If growth shareholders wish to benefit from Business Asset Disposal Relief (BADR) and the 18% Capital Gains Tax rate, they must:

• Hold the shares for at least two years
• Be an employee or officer of the company during that time
• Hold at least 5% of the ordinary share capital and voting rights, and be entitled to at least 5% of either the profits and assets available on a winding up, or the proceeds if the company is sold.

This last point is where growth share schemes most often trip up. Because value only accrues above a hurdle, growth shares usually fail the winding-up test, so the scheme must be drafted to meet the sale-proceeds limb instead, or BADR is lost regardless of how long the shares are held. Reaching the 5% threshold itself can also be tight, given growth tranches are usually small next to founders' holdings.

Making sure that you get exit planning with growth shares right means thinking ahead long before any sale, IPO, or buyout is on the table.

Clear crystallisation terms, well-drafted drag-along and tag-along provisions, a thoughtful approach to accelerated vesting, and a close eye on BADR eligibility can make the difference between a smooth exit and a messy one.

If you’re considering introducing growth shares or want to review an existing scheme ahead of a future exit, we can help!

For more information, download our free growth shares guide here