How Growth Shares Work: A Smart Way to Reward and Retain Key People

Growth shares – also known as accelerator shares – are a powerful and flexible way for business owners to reward key team members with a share in future success, without giving away current equity or causing tax complications. This blog breaks down how they work in practice, based on a simple example.

The Starting Point

Imagine a company on 31 December 2022 with the following financials:

– Turnover: £100,000
– Net Profit: £20,000
– Valuation: £60,000 (based on a 3x profit multiple)

At this point, one shareholder (let’s call them Person A) owns 100% of the company via A Shares. These shares give full rights to the assets and any dividends. If the company sold at this point, Person A would receive the entire £60,000 and 100% of any dividends.

Introducing Growth Shares

To bring a second person (Person B) into the business, growth shares (B Shares) can be issued. These shares are structured so that they only benefit from future growth. For example:
– Person A: 50% of B Shares
– Person B: 50% of B Shares

Growth shares are entitled to:
– Any value above £60,000 if the business is sold
– Any dividends above £20,000

This means Person A retains all existing value, while Person B only shares in the new value they help create.

Fast Forward – The Company Grows

Now picture the company on 31 December 2025:
– Turnover: £200,000
– Net Profit: £40,000
– Valuation: £120,000

If the business is sold:
– Person A receives the original £60,000 plus 50% of the £60,000 growth (£30,000)
– Person B receives the remaining £30,000 from the growth

In terms of dividends, if £40,000 is declared:
– Person A receives the first £20,000 and £10,000 of the remainder
– Person B receives £10,000

This approach ensures Person B only benefits from what’s been added after they joined.

Tax and Legal Considerations

One of the biggest advantages of growth shares is that they have no immediate tax consequences:
– No income tax or National Insurance upon issue
– No upfront payment required from Person B

However, growth shares must be properly set up. You’ll need:
– Updated Articles of Association
– A shareholders’ agreement (especially if dividends will be split differently)
– A professional valuation to set the starting point (e.g., £60k)
– To file share changes with Companies House

Flexibility and Retention

You can issue more growth shares later – for example, C Shares for a third person – using a new valuation. The percentage split between shareholders is also entirely flexible (e.g., 70/30, 80/20, etc.).

Growth shares are ideal for:
– Retaining and incentivising key staff
– Encouraging long-term commitment
– Rewarding performance without giving up existing equity or needing staff to ‘buy in’

Conclusion

Growth shares are a clever way to align the interests of your team with your company’s future, without the usual risks or complexity of traditional share schemes. If you’re thinking of using them, make sure to get professional legal and valuation advice to do it right.

Have questions or want to explore how this might work in your business? Feel free to get in touch.