Why Growth Shares can be an effective tool for retaining key employees

Retaining key employees is a major challenge for growing businesses, particularly where future value depends on the contribution of a small number of senior individuals. Traditional incentives such as salary increases or cash bonuses can be costly and may not effectively align employees’ interests with long-term growth. Growth shares provide a targeted equity incentive, rewarding employees directly for the creation of additional value and supporting retention over the longer term.

Growth shares are a separate class of shares that participate only in the increase in value of a company above a specified threshold. This allows existing shareholders to preserve the value already created, while enabling key employees to share in future upside. The structure ensures that employees benefit only where additional value is generated, aligning their interests with those of the shareholders.

From a retention perspective, growth shares are typically designed to deliver value over the medium to long term. Unlike cash incentives, which reward short-term performance, growth shares usually realise value only on an exit event. This can encourage continued commitment and align employees more closely with the strategic objectives of the business.

Growth shares also offer flexibility from a legal and commercial perspective. They can be structured with limited or no voting rights and restricted dividend entitlements, ensuring that control remains with existing shareholders. Vesting provisions, performance conditions, and good leaver and bad leaver provisions can be included to link participation directly to continued service and performance.

While growth shares are often compared with Enterprise Management Incentive (EMI) options, the two serve different purposes. EMI options can be tax-efficient but are subject to strict eligibility criteria and generally reward overall increases in company value, rather than growth above a defined threshold. Growth shares differ from EMI options in that employees physically hold shares from the outset, giving them a direct equity interest (albeit often with limited voting and dividend rights), whereas EMI options are rights to acquire shares in the future. Growth shares may therefore be more suitable where a company does not qualify for EMI or wishes to protect existing shareholder value, while rewarding future growth specifically above a defined threshold. They may be less appropriate for businesses seeking broad-based incentives, immediate cash rewards, or where employees are unlikely to remain until a value realisation event.

When properly structured, growth shares offer a commercially robust incentive that promotes retention, aligns employee and shareholder interests, and rewards the creation of genuine value, while safeguarding the position of existing shareholders.

If you require any assistance, guidance or advice, please contact Manjot Shokar.