In today's business world, companies are constantly seeking new and innovative ways to incentivize and retain their employees. One popular method is the use of growth shares.
What are growth shares?
Growth shares represent a proportion of a company's future growth and value, rather than an ownership interest in the company's existing assets and operations. They are typically issued to key employees to incentivise them to take an active role in driving the company's growth and success.
In this post, we'll explore the benefits they offer both employers (and existing owners/founders) and employees, why they require a signed shareholders agreement, and the tax advantages of using them.
Benefits for employers
Employers (and founder shareholders) benefit from growth shares by aligning the interests of key employees with those of the company. By offering these shares, employers create a direct financial incentive for key employees to drive growth, increase profitability, and create long-term shareholder value. Additionally, they can serve as an effective mechanism for retaining top talent and incentivizing employees to stay with the company for the long haul. They also do not dilute the value built up and accruing to existing and founder shareholders before the shares are issued.
Benefits for employees
For employees, growth shares offer a number of advantages. First and foremost, they provide employees with a direct financial stake in the future success of the company. This incentivizes employees to work harder, take on more responsibility, and ultimately contribute to the company's growth and success. Additionally, they can provide a sense of ownership and pride for employees, strengthening the bond between employee and company.
Why do growth shares require a signed shareholders agreement?
Because growth shares represent a future interest in the company's success, they require a signed shareholders agreement. This agreement specifies the rights and responsibilities of both the existing shareholders, the company and the employee. The agreement will typically outline vesting requirements, transfer restrictions, and the terms of any potential future equity offerings. It will also deal with what happens to those shares should an employee leave the company. Additionally, the shareholders agreement will clarify the duties and obligations owed by key employees as growth shareholders, including the expectation that they act in the company's best interest at all times.
Tax advantages
In addition to the benefits outlined above, growth shares offer a number of tax advantages for both employers and employees. For employers, the shares are often treated as a deductible expense for corporation tax purposes, which can reduce the overall tax liability of the company. For employees, the shares are often subject to preferential tax treatment, with gains subject to lower capital gains rates. Additionally, the fact that the shares relate to value in the future, rather than the present, means that employees are not immediately liable for tax on the value of the shares when they are granted.
Conclusion
Growth shares can be a powerful tool for employers looking to incentivize and retain top talent. By providing key employees with a direct financial incentive in the company's future growth and success, these shares can help align the interest of both employer and employee, driving growth, increasing profitability, and creating long-term shareholder value. However, it is important to ensure that the shares are accompanied by a properly executed shareholders agreement and/or changes to the company's articles to clarify the rights and obligations of both parties.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.