What can go wrong with Growth Shares?

Growth Shares are among the most powerful and accessible retention schemes available to eligible businesses, particularly when employers want to reward long-term contributions while protecting existing shareholder equity.

However, they are not a guaranteed win. For a growth shares scheme to work long-term, it must be carefully planned and implemented for the right reasons something emphasised by the Chartered Institute of Taxation, which notes that share-based incentives must be structured correctly to achieve their intended outcomes.

In practice, several things can go wrong, weakening retention and introducing new types of risk.

The hurdle must be selected carefully

Growth shares only gain value once the company valuation passes a predetermined threshold, known as the hurdle.

If an employee deems the hurdle too high, they may discount the value of the shares because the potential reward will feel much less tangible.

If the upside feels unrealistic, employees could disengage rather than feel incentivised.

Too much complexity can create mistrust

Growth shares, by their nature, are more complex than bonuses or salary increases. HMRC-commissioned research found that growth shares are “complicated to understand and explain” and that employees do not always fully understand their implications

Without proper care and communication:

Staff may not understand what they actually own or stand to gain
Misunderstandings about dilution, exit proceeds, or tax can create confusion and friction.

Even the best incentives will fail to motivate and retain if they aren’t understood.

Delayed rewards can weaken short-term retention

Growth shares typically only “pay out” during a liquidity event, such as a sale or IPO. This could be several years away, when growth shares are issued; it may not even be guaranteed in the foreseeable future.

HMRC research highlights that growth shares rely on future growth being realised, and if that growth does not occur, the anticipated reward may never materialise. This can create scenarios where employees leave before the value is realised, and competing employers offering more cash (or simpler equity) may be more attractive.

Retention tools work best when employees can feel progress.

Leaver provisions must be handled delicately

Growth share schemes usually include rules and provisions based on whether someone is a “good leaver” or a “bad leaver”. If these rules are inadequately planned, perceived as harsh, or applied inconsistently, several new risks are created:

There may be disputes if an employee leaves
Perceived unfairness can cause internal reputational damage and reduce trust in leadership.

Leaver provisions are designed to protect the business, but they should be set so that an employee feels genuinely motivated, not trapped.

Potential tax issues for recipients

Growth shares are designed to be a tax-efficient incentive for both the employer and the employee (they can reduce the risk of a dry tax charge when receiving shares with value).

But these tax efficiencies fail if proper planning doesn’t take place.

Incorrect valuation at grant can undermine tax efficiency
Hope value and future growth not being factored into the hurdle mechanism will result in increased tax risk.
Changes in tax laws or HMRC’s interpretation of growth shares valuations can also create problems
Employees' misunderstanding of when tax is due (if owned) can cause them problems personally.

The fear of unexpected tax complications can undermine the scheme’s appeal to employees who are not properly advised.

No exit = no value?

One of the biggest structural considerations for a growth shares scheme is that the shares only become worth something to the recipient upon an exit or liquidity event.

In other words, if the company doesn’t sell or the owners exit below the hurdle, then the employee gets nothing. This can lead to disappointment and attrition at exactly the wrong time.

How to get Growth Shares right

If you’re strongly considering growth shares (and for the right reasons), most of the risks listed in this article are avoidable if the right work is done up front.

Weak retention impact, valuation challenges or fears of unexpected tax can be mitigated with coordinated legal and tax advice.
Corporate finance specialists can help improve the defensibility of your valuations.
An expert in growth shares schemes can also help you clearly communicate how the scheme works to participants.

What about alternatives to Growth Shares?

If you are concerned about the risks listed here and are now considering alternative routes, a careful comparison of incentives, particularly EMI options, is a smart move. This can help determine whether a different structure would deliver better outcomes and stronger retention.

What are EMI Share Options?

EMI share options offer a low-risk alternative given valuations can be agreed in advance with HMRC providing reassurance for all parties. They can also benefit from preferential capital gains tax treatment in the hands of the individuals, where structured effectively, provided an enhanced net cash position.

The principal downside of EMI (an HMRC-regulated scheme) is that there will usually be many more compliance hoops to jump through than a growth shares structure. This won’t be ideal for every organisation, especially if they lack admin capacity and expertise. Additionally, not every business will necessarily qualify.

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Your growth shares scheme needs to be thoughtfully designed and carefully modelled. When done right, they become a genuinely powerful tool for aligning and retaining key staff in a tax-efficient way.