Growth Shares Vs Options: Attracting Talent In The UK

Offering equity is a powerful way to attract, motivate and retain great people. But once you’ve decided to share upside with your team, the next question is practical: should you use growth shares or options?

Both can work well for UK SMEs and startups, but they operate differently, have different tax consequences, and require different legal steps. Picking the wrong approach can create unexpected tax bills, messy cap tables or shareholder disputes later on.

In this guide, we’ll break down growth shares vs options in plain English and from a business owner’s perspective, so you can choose a route that fits your stage, goals and budget.

What Are Growth Shares And Options?

At a high level, both growth shares and options are tools for sharing equity with employees, advisors or contractors. They’re designed to align incentives without paying out large cash salaries.

Growth Shares (Sometimes Called Hurdle Shares)

Growth shares are a class of shares that only participate in value created above a pre-agreed “hurdle” (usually set at the current market value of the company). They’re typically issued at a very low price, because on day one they’re only entitled to future growth, not existing value.

Key features:

• They are actual shares from day one, with voting/dividend/exit rights tailored in the articles.
• They usually have a hurdle or “threshold” so that they only gain value if the business grows beyond today’s valuation.
• They can be subject to vesting and leaver provisions (e.g. good/bad leaver) within a Share Vesting Agreement and the company’s articles of association.
• They can simplify tax at grant if the subscription price is close to fair market value of the limited rights attached (but valuation and structuring need care).

Options (Often EMI Options For SMEs)

Options give the recipient the right (but not the obligation) to acquire shares in future at a fixed price (the “exercise price”). Many UK SMEs use tax-advantaged Enterprise Management Incentive (EMI) options where eligible.

Key features:

• No share ownership on day one - holders only become shareholders if/when they exercise.
• Exercise is typically tied to vesting or milestones (e.g. time-based vesting or an exit).
• EMI options have attractive tax treatment if the company and recipient meet HMRC criteria, and if the plan is set up correctly.
• Non-EMI (unapproved) options can still work, but tax outcomes are generally less favourable.

If you’re leaning toward options, it’s worth exploring dedicated EMI options or broader Enterprise Management Incentives with a lawyer to confirm eligibility and structure.

Growth Shares Vs Options: The Key Differences That Matter

Both mechanisms can motivate your team, but they behave differently in practice. Here are the big-picture differences to weigh up.

1) Ownership And Control

• Growth shares make the recipient a shareholder straight away. That can be motivating, but it also brings shareholder rights and administration from day one.
• Options defer ownership. The person isn’t a shareholder until exercise, so there’s no immediate voting participation or dividend entitlement (unless the options are exercised).

Think about whether you want the individual in your shareholder base now, or only if they stay to vest and you hit milestones.

2) Tax Treatment

• Options under EMI often deliver the most favourable UK tax treatment, with potential capital gains treatment on exit and no Income Tax/NICs on grant (assuming rules are met).
• Growth shares can be efficient if structured with a proper hurdle and fair market valuation, but getting valuation wrong can trigger Income Tax at acquisition.

We cover taxes in more detail below, but tax is usually the main reason options (particularly EMI) are favoured by early-stage, high-growth companies.

3) Valuation And Pricing

• Options: you set an exercise price, often aligned to HMRC-agreed value for EMI. Recipients pay that price on exercise.
• Growth shares: recipients typically subscribe for the new class at a low price that reflects they only share in future growth above the hurdle.

In both cases, objective valuation is important to manage tax risk and keep things fair for existing shareholders. Understanding unrestricted market value is especially relevant when you’re agreeing a price with HMRC for EMI.

4) Cap Table Impact

• Growth shares dilute other shareholders immediately on issue, even if their economic rights only kick in above the hurdle.
• Options dilute only if/when exercised, so your headline fully diluted ownership increases but your issued share capital does not change until exercise.

If cap table simplicity today is a priority, options can be tidier. If you’re optimising for long-term alignment and are comfortable with an additional share class, growth shares can be compelling.

5) Commercial Flexibility

• Growth shares can be highly bespoke via your articles: different voting rights, dividend policies and leaver outcomes.
• Options are flexible through plan rules and option agreements, but usually funnel into ordinary shares on exercise.

In either route, document design and clear leaver provisions are critical. A robust Shareholders Agreement should sit alongside your equity incentives to manage transfers, leaver situations, drag/tag and dispute processes.

UK Tax Considerations: EMI Options Vs Growth Shares

We can’t overstate this: tax should drive your decision as much as commercial preferences. While we won’t go into legalese, here’s the practical overview in the UK environment (Companies Act 2006 and the Income Tax (Earnings and Pensions) Act 2003 are the key frameworks, with HMRC guidance on share schemes).

EMI Options (Tax-Advantaged)

EMI is a government-backed scheme designed for SMEs. If you qualify and set it up correctly:

• No Income Tax or NICs on grant.
• Usually no Income Tax or NICs on exercise if the exercise price is at least the market value agreed with HMRC at grant.
• On sale of the underlying shares, gain is typically subject to Capital Gains Tax (CGT). If certain holding and working-time conditions are met, Business Asset Disposal Relief (BADR) may apply, potentially reducing the effective CGT rate.
• Employer corporation tax deductions may be available on exercise.

There are eligibility criteria (e.g. gross assets and employee number limits, excluded activities). Getting HMRC valuation clearance for the exercise price is common practice to lock down tax certainty.

Unapproved Options

If you can’t use EMI, unapproved options are an alternative - but:

• There may be Income Tax and NICs on exercise on the “spread” (market value at exercise minus exercise price).
• Subsequent growth post-acquisition is usually CGT.

Unapproved options can still be useful for advisors or overseas hires, but model the tax ahead of time so the economics still motivate the recipient.

Growth Shares

Growth shares are acquired up-front, so the primary tax event is at acquisition. If the subscription price is below fair market value of those shares (taking into account the hurdle and restrictions), the undervalue can be treated as employment-related income subject to Income Tax (and possibly NICs).

With careful design (a properly calibrated hurdle, appropriate restrictions and a defensible valuation), many companies aim to keep the acquisition value low and legitimate, so that future value growth is taxed under CGT on exit. But this requires careful planning and specialist valuation work.

Regardless of your route, remember your reporting duties to HMRC. Employment Related Securities (ERS) reporting applies to both options and share awards, and getting filings wrong can jeopardise favourable tax treatment.

When To Use Growth Shares Vs Options: Practical Scenarios

Here are common scenarios we see with UK SMEs and what usually works best.

You Want The Most Tax-Efficient, Scalable Plan For Early-Stage Growth

EMI options are often the first choice. They’re familiar to investors, can sit behind clear plan rules, and keep your issued share capital tidy until exercise. They also help standardise incentives across multiple hires.

You Want Immediate Shareholder Alignment And Custom Rights

Growth shares can be great if you want the individual to be “in the club” from day one, but only share in future value. They’re particularly effective when you need to tailor voting, dividends or leaver outcomes in your articles.

You’re Bringing In Senior Joiners Close To An Exit

Short-dated EMI options or growth shares with a well-set hurdle can both work. The decision often turns on valuation certainty and the simplicity your corporate lawyers and buyers prefer at exit.

You’re Worried About Dilution And Future Rounds

Options keep dilution contingent on exercise, which some founders prefer while they’re still raising and adjusting the cap table. Whichever route you take, it’s smart to model dilution and build it into your plan size. If dilution is a core concern, review strategies in this overview of share dilution and consider investor expectations in your sector.

How To Implement Equity The Right Way (And Stay Compliant)

Once you’ve picked a route, it’s crucial to execute cleanly. A messy share scheme can create headaches with investors, buyers and HMRC. Here’s a practical checklist.

1) Decide Your Plan Objectives

Who are you trying to incentivise? What behaviours or milestones matter? Are you prioritising tax efficiency, speed, or long-term alignment? A quick strategy session will guide whether growth shares or options are the right tool.

2) Get Your Valuation Right

For EMI, agree a valuation with HMRC where possible. For growth shares, instruct a valuation that reflects the hurdle and restrictions. A well-justified valuation underpins tax treatment and employee trust.

3) Set Vesting And Leaver Mechanics

Vesting should be clear, fair, and tied to time and/or performance. Leaver provisions need to be robust and enforceable. Where you’re issuing shares up front, pair the issuance with a Share Vesting Agreement to implement reverse vesting and buy-back rights on leaver events. If you’re using options, build vesting and leaver terms into the option plan rules and letters.

If you’re still mapping out the schedule, this guide to vesting periods can help shape timelines and cliffs.

4) Update Your Corporate Documents

Growth shares typically require amending your articles to create the new class and set the hurdle/rights. Options require adopting plan rules and issuing option agreements. In either case, align everything with your Shareholders Agreement so drag/tag, transfers and leavers all fit together.

If you’re early in the journey, it may also help to revisit how you plan to split ordinary shares among founders - see How To Allocate Shares In A Startup for a practical framework.

5) Approvals, Filings And Ongoing Compliance

• Board and shareholder approvals as required by your articles and Companies Act 2006.
• Company filings at Companies House for new share classes or allotments.
• HMRC ERS registration and annual returns for both options and share awards; EMI notifications within HMRC deadlines.
• Maintain accurate option and share registers - investors and buyers will diligence this.

6) Plan For Exits And Buy-Backs

Decide what happens on exit, termination or performance failure. If you’re using growth shares and a leaver departs early, you may need to buy back unvested shares - have a mechanism ready. A tailored Share Buyback Agreement can streamline those events and keep your cap table tight.

Common Pitfalls And How To Avoid Them

Even well-intentioned equity plans can misfire. Here are the traps we see most often.

Issuing Growth Shares Without A Proper Hurdle Or Valuation

If the hurdle is set too low or the valuation isn’t defensible, employees can face Income Tax at acquisition and you can end up with retrospective issues with HMRC. Calibrate the hurdle carefully and document your valuation.

Missing EMI Eligibility Or Deadlines

EMI has specific company and individual eligibility rules, grant limits and notification timelines. Miss a deadline and you can lose the tax advantages. Build a grant workflow and calendar around HMRC requirements from the start.

Unclear Leaver Provisions

Disputes happen when plan rules or share terms don’t define good vs bad leavers, how vesting accelerates (if at all), and at what price leavers sell unvested/vested equity. Good documents are essential - avoid generic templates and tailor the terms to your culture and risk profile.

Over-Dilution Without A Plan Size

Setting an equity pool (for example, 10% on a fully diluted basis) and budgeting grants across roles keeps you disciplined and investor-friendly. Keep a running view of fully diluted ownership and update your model after each grant.

Forgetting The Exit Story

Buyers will diligence your equity history. Inconsistent agreements, missing board minutes, or unfiled ERS returns can delay or discount your deal. Invest in clean process and records today so your future self thanks you.

How To Choose: A Quick Decision Framework

Still undecided? Use this practical filter.

• If you’re an early-stage SME/startup eligible for EMI and you want a standardised, tax-efficient solution for multiple hires: options (preferably EMI) are likely best.
• If you want the person to be a shareholder now and give truly bespoke rights tied to future value creation: growth shares can be ideal.
• If valuation certainty is hard to obtain and you need simple admin with familiar investor expectations: options usually win.
• If you’re crafting highly tailored incentives for a small number of senior joiners and have the time for bespoke articles/agreements and valuation: growth shares can shine.

Whichever route you choose, anchor the plan to your hiring roadmap, fundraising timeline and long-term cap table strategy. Keep your documentation aligned and revisit terms as your business evolves.

Key Takeaways

• Growth shares make recipients shareholders from day one and only share in value above a hurdle; options defer ownership until exercise and, under EMI, often deliver the most favourable UK tax outcome.
• Tax is pivotal: EMI can offer no Income Tax on grant/exercise and CGT on exit (subject to conditions), while growth shares rely on careful hurdles and valuation to avoid upfront Income Tax.
• Design vesting and leaver terms clearly and document them through an option plan or a Share Vesting Agreement, keeping everything consistent with your Shareholders Agreement and articles.
• Get valuation right and maintain clean approvals, Companies House filings and HMRC ERS reporting to protect tax treatment and future exit value.
• Model dilution on a fully diluted basis and set an equity pool so grants stay aligned with hiring plans and investor expectations; explore how to allocate shares and dilution strategies early.
• If EMI eligibility is in doubt or you need help calibrating hurdles/valuations, speak with a lawyer before issuing awards; understanding UMV and HMRC practice will save headaches later.

If you’d like tailored help deciding between growth shares vs options - or you need the right documents drafted and filed - you can reach us on 08081347754 or team@sprintlaw.co.uk for a free, no-obligations chat.