For UK companies aiming to retain top talent, reward key contributors, and handle equity effectively without diluting current shareholders, Growth Shares offer a powerful solution. When structured correctly, this approach can also be really tax-efficient.

While all details of Growth Shares require attention, the initial and most critical step is ensuring the entire plan is fully compliant, covering several crucial areas.

Board and shareholder approval for Growth Shares

To issue growth shares, you need board and shareholder approval. This usually requires a formal board meeting with minutes documenting the decision. The board must agree upon:

• The number of growth shares to be issued
• The class right attached to them
• Who is receiving the Growth Shares and why

Failing to document these details precisely can lead to big issues in the event of an acquisition or liquidation.

What are Articles of Association?

You will then need to amend the company’s Articles of Association to define the rights of the growth shares (such as dividend restrictions, limited voting rights, and exit conditions).

This is your company’s constitution, and the rights must be written clearly to avoid interpretation issues.

If you’re using EMI (Enterprise Management Incentives), you’ll also need to align your Articles with EMI tax requirements to ensure tax reliefs aren’t disqualified.

Once drafted, these revised Articles need to be approved by shareholders and then filed with the relevant regulatory body.

The Growth Share agreement

This is the rulebook for how recipients earn, keep, or lose their shares. It will set out how growth shares interact with existing equity and any future exit events (such as the sale of the business).

Without this agreement, disputes over entitlements can become major headaches, especially at the point of a lucrative exit.

Understand Cap Tables & Dilution of Equity

Issuing growth shares affects your company’s cap table, this is the spreadsheet that tracks who owns what in the business.

Growth Shares don’t usually dilute existing shares unless the company’s value increases, but you will still need to consider these aspects:

• Future cap table scenarios
• How growth shares concert into ordinary shares or exit proceeds
• The total equity pool

You’ll also need to communicate the structure clearly to potential investors. If your growth shares are misunderstood or misrepresented, it can derail a fundraising round.

Structuring Growth Shares for HMRC

Tax is often a key reason why companies choose growth shares over traditional stock options. But there is a catch: you need to prove the shares are low in value at the time of grant to mitigate income tax liabilities.

The valuation of growth shares is not agreed in advance with HMRC which reinforces the value of a robust report, which can stand up to scrutiny at present and should HMRC enquire in the future.

This protects recipients from paying excessive tax when they’re granted their shares. Instead, they’ll usually only pay Capital Gains Tax on any profits made at exit, which can be as low as 14% under Business Asset Disposal Relief (formerly Entrepreneurs’ Relief).

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We have written a detailed guide to Growth Shares for modern business owners, and you're welcome to download it today to learn more about this exciting incentive.

Download Complete Growth Shares guide

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