Growth Shares Explained: Legal Considerations for Business Owners and Investors

Thinking about supercharging your business’s growth, or searching for a smart way to attract top talent and investors? Growth shares could be just the key. This modern approach to equity lets business owners reward people who truly help their company expand - without immediately giving away a huge piece of the pie.

Whether you’re running a scaling startup, negotiating with investors, or wanting to incentivise your best team members, understanding growth shares is crucial. But (as with all things business) it’s not just about the potential rewards - you need your legal foundations built securely from day one.

In this guide, we’ll break down exactly how growth shares work, the legal ins and outs you can’t skip, and the best practices for getting started. Let’s dive in!

What Are Growth Shares?

Growth shares are a special type of share class designed to reward future performance, rather than giving away a stake in the current value of your business. Instead of immediately sharing all existing profits and past value, growth shares allow holders - usually key employees, founders, or new investors - to benefit only from growth above a set level or “hurdle.”

Simply put: growth shares let you motivate and reward those who help build your company’s future wealth, without diluting what’s already been created.

• No automatic rights to past company value: Holders only share in value gained after a hurdle is reached.
• Ideal for startups and scaling companies: Useful when you want to attract or retain co-founders, critical staff, or new investors, but keep original equity protected.
• Flexible rights and restrictions: You tailor exactly how voting rights, dividends, and exit proceeds are split between ‘ordinary’ shareholders and ‘growth’ shareholders in your Shareholders Agreement and your Articles of Association.

Why Are Growth Shares So Popular Right Now?

It’s easy to see why growth shares are attracting so much interest. If you’re running a high-growth business, you know that success often depends on keeping key players engaged and motivated. Growth shares can be an attractive alternative to traditional share schemes, especially for early-stage companies since:

• They align rewards with actual business growth - if the company doesn’t take off, there’s no automatic windfall.
• They can help you attract talent who might otherwise be out of your salary range, by letting them participate in future upside.
• They cap the dilution to existing shareholders - you don’t give away more than you need to.
• They can be more tax-efficient than some employee option schemes, with the right setup (though specialist advice is always a must here!).

How Do Growth Shares Actually Work?

The basic idea is to set a “hurdle” value - either based on the company’s valuation, net assets, or some other benchmark. Growth share holders do not benefit from any value below this hurdle. Only if the company grows beyond the hurdle (either at exit, on sale, or sometimes for dividends) do growth share holders participate in the additional value created.

Here’s an example scenario:

• The Company is worth £1 million today. You want to bring on a new CTO but don’t want to dilute co-founders’ shares.
• You issue growth shares with a hurdle of £1.2 million. The CTO only shares in company value generated above £1.2 million.
• If the business is sold later for £2 million, the growth shareholder only benefits from the £800,000 growth (subject to the terms agreed).

This structure calls for watertight documentation and careful consideration to make sure everyone’s rights (and potential tax positions) are clear.

What Are The Key Legal Steps To Set Up Growth Shares?

As with most equity incentives and arrangements, the right legal process is essential to keep things fair, clear, and compliant. Here’s what you’ll need to do:

1. Draft or Amend Your Articles of Association

Your company’s Articles of Association are the rulebook for how shares work in your company - you must include new growth share rights, hurdles, and restrictions in this document. If you already have a company set up, you’ll likely need to amend the Articles to create the new class.

2. Prepare a Comprehensive Shareholders’ Agreement

A Shareholders’ Agreement isn’t legally required in the UK, but it’s absolutely crucial when it comes to multiple share classes. This document sets out how shares can be sold or transferred, protections for minority holders, and how proceeds are divided if the business is sold or listed. It’s also your chance to clarify leaver provisions, bad leaver/good leaver rules, and tax indemnities.

3. Issue New Growth Shares (With Legal Notices and Registers)

The process of creating and issuing new shares (including growth shares) must be properly minuted, notified to Companies House, and entered into your statutory registers. Get this wrong and you risk invalid or challengeable share issues.

4. Consider Employee Agreements & Incentives

If you’re using growth shares as an alternative to options or part of an employee share scheme, be sure to review your employment contracts and side agreements. You’ll want clear communications and documentation about what rights are being granted - and under what conditions staff keep or lose those shares.

5. Register for Tax and Get Specialist Advice

Issuing growth shares can have complex tax consequences for both the company and recipients. HMRC may view them as “employment-related securities,” with reporting obligations and up-front income tax if not managed carefully. You’ll often want professional tax and legal advice to structure your arrangement in a tax-efficient (and compliant) way. Explore Enterprise Management Incentives (EMI schemes) as another tax-advantaged alternative if you’re qualifying.

What Should Your Growth Share Terms Include?

No two companies are quite the same, so there’s no one-size-fits-all template for growth share classes. However, your Articles of Association and Shareholders’ Agreement will usually specify:

• Hurdle Rate: The base value the company must reach before growth shares deliver value.
• Rights on Exit: Who gets paid first, and how much, on a sale or IPO?
• Voting Rights: Do growth shares carry votes? Full voting, limited, or none at all?
• Dividend Rights: Can growth share holders receive dividends, and under what conditions?
• Transfer Restrictions: Can growth shares be sold or transferred, and if so, to whom?
• Leaver Clauses: What happens if an employee or founder leaves the company?

It’s essential you work with a legal expert to draft these terms so they truly suit your business goals, comply with company law, and avoid ambiguity (which could lead to disputes or costly mistakes later).

What Are The Legal Risks And Pitfalls With Growth Shares?

Growth shares offer fantastic opportunities - but without solid legal planning, things can go wrong. Some common issues our team sees include:

• Poorly defined hurdles: If the “hurdle” is unclear, you could face arguments over whether growth shares are triggered.
• Conflicts with employment law: When growth shares are tied to staff, you must consider rights if someone leaves, is dismissed, or faces redundancy.
• Tax surprises: Getting the tax position wrong can mean unexpected bills for the recipient or the company - always seek specialist tax advice.
• Invalid share issuance: Not following the correct Companies House procedure, or breaching existing shareholder pre-emption rights.
• Disputes over voting or exit: If terms aren’t clearly set out, you could face serious disagreements when the business is sold or grows rapidly.

Growth shares are powerful, but they change the balance of incentives, rewards, and risks. Before you proceed, weigh up all the implications and have watertight contracts in place. We always recommend a tailored legal review of your documentation before any growth shares are issued.

Are Growth Shares Right For My Business?

Growth shares are a flexible tool, but they are not for everyone. Here are four scenarios where they may be especially useful:

• High-growth startups looking to incentivise senior hires or retain key founders (without giving away “core” equity).
• Companies with passive investors wanting to ring-fence early value for original backers, but reward new capital providers.
• Businesses with an upcoming sale or IPO, keen to align team interests and drive value to a target exit price.
• Family or legacy businesses wanting to share upside with next-generation or non-family managers, without changing historic control.

If you’re unsure whether growth shares, share options, or traditional equity is right for your organisation, a session with a corporate lawyer can help you make a confident and informed choice.

What’s The Difference Between Growth Shares, Options And Other Share Classes?

It’s easy to get lost in the jargon. Here’s a quick breakdown of how growth shares compare to other common equity tools:

• Growth Shares: Share only in future upside above a hurdle, often no claim on current value. Flexible rights.
• Ordinary Shares: The standard “full value” shares, with voting, dividends, and exit rights tied to every increase in value.
• Option Schemes: A contractual right to buy shares in the future once performance or time-based criteria are hit - employees don’t become shareholders until they ‘exercise’ options.
• Alphabet Shares (A, B, C): Custom share classes with different voting, dividend, or capital rights, but usually participate from day one.

Each structure has its own legal and tax implications, so you’ll want advice on which best fits your vision, funding needs, and team incentives. Explore more on share subscriptions and share schemes on our blog.

What Laws And Regulations Affect Growth Shares In The UK?

Several key pieces of UK company law and tax legislation are relevant whenever you create and issue growth shares:

• Companies Act 2006: Governs how share classes are created, altered, and issued. You must comply with procedures on amending Articles of Association and registering new share issues.
• Income Tax (Earnings and Pensions) Act 2003: Provides rules for employee shares - HMRC may tax some share awards as income unless you structure them carefully.
• Employment Rights Act 1996: Protects employees’ rights over share-based pay and exit packages. Leaver clauses must be fair and transparent.
• Shareholder Agreements and Pre-emption Rights: Your documents may grant certain shareholders first refusal on new share issues, which you’ll need to respect when creating growth shares.

It’s important to ensure every legal step is taken with care, not just to protect your business, but also to provide confidence for any investors or team members receiving growth shares.

Can I Issue Growth Shares Through My Existing Company, Or Do I Need A New Entity?

You can usually create growth shares by amending your current company’s Articles of Association. In some cases - for example, if you want to ring-fence high-risk or high-reward projects - it can make sense to set up a new company or holding company structure. There’s no ‘one right way’ - think about your growth goals and funding plans, and get expert guidance on what will work best both legally and for tax efficiency.

How Do Growth Shares Affect Exit And Succession Planning?

If you’re planning to sell your business, float on a stock market, or hand over to new directors in the years ahead, it’s critical your growth shares structure is clear. You’ll want to:

• Spell out exactly how sale proceeds are shared between ordinary and growth shareholders.
• Minimise any risk of disputes with minority shareholders or leavers at the exit point.
• Review your Shareholders’ Agreement regularly to ensure it still matches your plans.

Having robust documents and a clear “exit waterfall” built in from the start will make future transactions run more smoothly - saving both time and money during a potentially stressful period for your business.

What Are Best Practices When Issuing Growth Shares?

Setting up growth shares can be transformative for your business. But for everything to run smoothly, keep these best practices in mind:

• Always update your Articles of Association to create new share classes - and register changes at Companies House.
• Clearly document all growth share terms, including hurdles, voting, leaver clauses, and transfer restrictions.
• Seek specialist legal and tax advice up front for both the company and recipients.
• Be transparent with new shareholders, founders, or employees about what they are receiving - and what must be achieved for a payout.
• Review your share structures regularly as your business and plans evolve.

If you’re ready to set up growth shares but not sure where to start, connecting with a business-focused solicitor can make all the difference.

Key Takeaways: Growth Shares For UK Business Owners And Investors

• Growth shares are an agile way to reward value creation and incentivise future success in your company.
• Your Articles of Association and Shareholders’ Agreement must be precisely drafted to avoid future disputes and legal risks.
• HMRC tax treatment of growth shares can be complex - specialist advice is a must.
• Clear documentation and compliance with Companies Act 2006 are required to issue growth shares validly.
• Growth shares are best for startups, scaling businesses, and succession scenarios where you want to motivate ongoing performance but protect established equity.
• Regularly review and update your legal documents as your business grows and your funding strategy changes.

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If you’d like tailored support or have questions about setting up growth shares, reach out to us at 08081347754 or team@sprintlaw.co.uk for a free, no-obligations chat. Our team can help you ensure your share structure is working for your business from day one.