Yesterday, I’ve committed to regularly document not just my thoughts and observations, but also lessons learned at Splento HQ.
Here goes the first one.
There is a separate type of shares that many founders and CEOs perhaps are not aware of, but they should be. These are called Growth Shares, which are one of the most effective and tax efficient ways to incentivize team and advisors.
Growth shares are a separate class of incentive shares which allow employees to benefit only in the growth in value of your company. They reward employees for delivering growth in company value by enabling them to share in a proportion only of that future growth.
Imagine that your company is currently worth £10m. The company has one class of ordinary shares. The company decides to incentivise some of the A-Players with shares. Rather than issuing them with ordinary shares, the company issues growth shares that would entitle them to 10% of any sales value in excess of £10m. If the company was sold three years later for £15m then the holders of the growth shares would be entitled to £0.5m in total (i.e. 10% of the £5m growth since they were issued).
The purpose for using growth shares is two-fold:
1) First, existing shareholders are only value diluted for growth from the point growth shares are issued, rather than the existing worth of the company.
2) Second, growth shares limit the risk of a recipient of growth shares being exposed to income tax on award of the shares. So long as the shares are issued at a “hurdle” that reflects what the Taxman would see as the value of the company at the time, then they are only exposed to Capital Gains Tax on an eventual sale.