The terms “growth shares” and “freezer shares” are frequently discussed in the context of startups, private companies and venture capital investments. Both play critical roles in attracting investment, rewarding founders and shaping a company’s ownership structure. However, these two types of shares serve distinct purposes. Understanding their characteristics can offer insights into how entrepreneurs and investors alike can leverage them for long-term success.

Growth Shares

What are growth shares?

Growth shares are a class of equity typically issued in private companies, particularly in startups or businesses in early-stage growth. These shares are often used as an incentive to key employees or shareholders and are often used in Family Investment Companies (“FICs”)

The key feature of growth shares is that they carry a benefit only if the company’s value increases beyond a certain point, from the time that the shares are issued. This threshold can be set by the company and can cover a wide range of options e.g. achieving a certain profit or valuation of the business.

For instance, a company might issue growth shares to employees, allowing them to participate in helping to increase the company’s value from the point the shares are issued. However, they generally do not entitle the holder to any benefit if the company is sold or its valuation is lower than a set threshold.

Growth shares are typically structured with a “hurdle rate”, which is the minimum value the company must achieve before these shares start to generate returns for the holders. Once the company’s valuation exceeds the hurdle, growth shares can provide substantial upside for the holder, making them an attractive tool for incentivising employees and motivating performance.

Growth shares benefit both the company and its employees. For companies, these shares can help in attracting and retaining top talent without giving away too much equity upfront. For employees, they offer a potential for significant financial reward tied to the company’s growth, aligning their interests with the company’s success.

Freezer Shares

What are freezer shares?

Freezer shares refer to a process whereby the value of the shares is ‘frozen’ so that it cannot grow further, and a new class of shares is created that will benefit from future growth. Freezer shares are entitled to a preferred amount of value on an exit event/winding up, whereas the growth shares are entitled to the future capital growth of the company.

Freezer shares are commonly used when setting up FICs. The intention of a FIC is to freeze the value of the shares so that future growth in value accrues to the intended beneficiary, which will typically be the next generation.

The freezer shares and growth shares are key wealth management and succession planning tools:

• The freezer shares lock in the current value of existing assets, so they do not grow, and the value is preserved for the older generation, so they get a certain amount at an exit;
• The growth shares allow younger family members to benefit from future growth in company assets and wealth accumulation over time. Growth shares typically only start to accrue value when the company exceeds a certain threshold, so younger generations are aligned with the business’s success.

If you have any questions or would like more information, please do not hesitate to contact Sophie Henwood or the Geldards corporate team.