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Shares

Growth Shares Explained

Growth shares are a separate share class that only gains value once the company's worth rises above a set hurdle. They let senior hires share in future growth without diluting existing shareholders' current value.

Main jurisdiction
UK, also used elsewhere with local adaptation
Key concept
Hurdle value
Common recipient
Senior hires or executives
Tax benefit
Low value at grant, so low income tax exposure

What growth shares are

Growth shares are a class of shares that only participate in value created above a set threshold, called the hurdle. If the company is worth 10,000,000 today, growth shares might be set with a 10,000,000 hurdle, meaning holders only benefit from the value the company creates above that figure, unlike preferred shares, which carry a claim on value from the first euro.

Because the shares have little or no value at the point of grant (they only pay out on value above the current level), the tax charge on receiving them is typically small, which is the main reason companies use this structure for senior or later-joining employees whose share value, under a normal startup valuation, would otherwise trigger a large tax bill.

Worked hurdle example

Suppose a company is valued at 10,000,000 when growth shares are granted, with the hurdle set at that level and the growth shares representing 5% of the growth above the hurdle. If the company is later sold for 20,000,000, the value above the hurdle is 10,000,000, and the growth shareholders share in 5% of that, or 500,000, split among however many growth shares exist.

Exit valueValue above hurdleGrowth share pool (5%)
8,000,0000 (below hurdle)0
10,000,00000
15,000,0005,000,000250,000
20,000,00010,000,000500,000

When founders reach for Growth Shares

  • Hiring a senior executive at a company that has already raised at a high valuation, where ordinary shares or standard options would carry a large tax cost
  • Rewarding a specific period of future growth, rather than the value already built
  • Situations where investors want to avoid diluting the current share price for existing holders

Growth shares are a bespoke legal structure requiring a proper valuation to set the hurdle correctly and specific drafting in the articles of association. This is more complex and costly to set up than a standard option grant, so it tends to be reserved for higher-value hires.

Growth Shares compared to the alternatives

FactorGrowth sharesOptions
OwnershipReal shares from grantOnly on exercise
Setup costHigher, needs valuation and bespoke articlesLower, more standardised
Common tax scheme fitNot usually EMI eligible in the same wayOften EMI eligible in the UK
Best suited toSenior hires at higher-valued companiesBroad-based grants at most stages

Growth shares, common sticking points

Are growth shares only used in the UK?
They are most established in the UK, but similar hurdle-based structures exist in other countries, usually adapted to local company and tax law.
What happens to growth shares if the company never grows above the hurdle?
The shares remain worth nothing, since they only capture value created above that starting point. This is the main risk holders accept in exchange for a lower tax cost at grant.

General information for founders, not legal or tax advice. Thresholds and rates change, so confirm the current position with an adviser in the relevant country before granting.

Hurdles, tax and other share classes

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