Growth shares

Rewarding Talent in your Business

In today’s competitive job market, companies are increasingly using equity compensation to attract, retain and reward talented employees. There’s an expectancy among workers in some new and fast-growing businesses in the small and medium-sized enterprise (SME) sector that at least some of their pay package will be in the form of an equity-based reward, enabling them to financially participate in the future success of the company.

Although this article covers the use of growth shares, there are number of alternative equity reward models that may work for your business, including share options, restricted shares/units, approved profit-sharing schemes, and convertible shares. Also, Ireland’s Key Employee Engagement Programme (KEEP) can enable the award of share options to employees, which do not trigger income tax for the employee when exercised, subject to a number of conditions.

What are growth shares?

Growth shares are a special class of share that are issued to employees to enable them to participate in the future value of the company. The rights attaching to growth shares are generally designed in a way that their value is limited (or nothing) until a specified business valuation ‘hurdle’ is achieved. At this point, the growth shares ‘flower’, entitling the holders to participate in the valuation of the company past this point.

Tax treatment of growth shares

Growth shares issued for no consideration or at a discount to an employee are considered a taxable benefit-in-kind (BIK) in the hands of employee and are therefore subject to income tax, the universal social charge (USC), and pay-related social insurance (PRSI). However as mentioned, the growth share rights are usually designed in a manner where the ‘hurdle’ is set at a point which makes the day one market value of the growth shares tend to be very low, and therefore this upfront tax cost from the employee should be relatively manageable.

Benefits for employers and existing shareholders

In small businesses with founder shareholders who have a significant equity interest in the company, growth shares are a useful tool which allow employees to be rewarded on future value only, securing the existing built-up value for existing shareholders.

Growth shares can assist in retaining key talent as they generally only deliver value to the holder if they remain with the company and help to achieve its growth/valuation target. Employers also have flexibility when setting the rights attached to the shares, as well as good leaver and bad leaver provisions.

Benefits for employees

As growth shares are structured to have a low or nil value on issue, only a small upfront tax cost may arise for employees.

Also, proceeds received from the subsequent sale of the growth shares would be subject to capital gains tax (CGT) at a rate of 33% rather than income tax (up to 55%).

Additional considerations

Any employee growth share scheme should be backed up by a valuation of the related shares, to determine the level of taxation arising on the issue of the shares to employees. A growth share scheme doesn’t require Irish Revenue authorisation. However, records for the valuation should be retained to help deal with a potential future Irish Revenue enquiry or challenge.

Stamp duty generally applies to the transfer of the shares at 1% on the higher of market value or consideration given for the shares. However, the issue of new shares by a company is not within the scope of Irish stamp duty.

If you’d like to hear how Saffery could assist you with the implementation of a share scheme in your business, please get in touch.