What are growth shares?
By SuLe · Updated 8 May 2026
Growth shares are a special class of shares that only share in value above a set "hurdle" — usually pitched just above the company's current value. Because they are almost worthless at the hurdle, recipients acquire them cheaply now and pay tax on future growth as a capital gain. They can go to anyone, which makes them the usual alternative when EMI is unavailable.
Key facts
- Growth shares participate only in value above a hurdle, often set around 1.2x the company's current value.
- Their low value at acquisition means little or no income tax up front, especially with a section 431 election.
- A section 431 election should be signed within 14 days of acquiring the shares.
- Unlike EMI, growth shares can be issued to non-employees — contractors, advisors and non-executive directors.
- They require new articles of association, a defensible valuation and board/shareholder approvals.
What are growth shares?
They are a bespoke class of shares engineered to capture only future upside. A hurdle is set — a value the company must exceed before the growth shares are worth anything — typically a little above today's value, such as 1.2 times it.
Below the hurdle, the growth shares carry effectively no value, so the existing ordinary shareholders keep everything built up to date. Above it, the growth shares share in the increase.
That structure lets you give someone a stake in the company's future without handing over any of its existing value — and without the eligibility gates that EMI imposes.
How do growth shares work mechanically?
You create the class in new articles of association, defining the hurdle and how the growth shares participate once it is passed. The recipient subscribes for the shares at their low current value.
On an exit or other realisation, value up to the hurdle goes to the ordinary shareholders; value above it is split between ordinary and growth shares according to the terms. The higher the hurdle, the less the growth shares are worth today and the cheaper they are to acquire.
Because they are real shares, not options, the recipient becomes a shareholder immediately — a difference that matters for control, information rights and the cap table. [More: What is a cap table and how do I keep it clean?]
When would I use growth shares instead of EMI options?
When EMI cannot reach. The clearest case is a non-employee — a contractor, advisor or non-executive director — who cannot hold EMI options at all. [More: Can contractors or advisors receive share options?]
The second is a company that has outgrown EMI, whether past 250 employees, over £30m of gross assets, or in a non-qualifying trade. Growth shares have none of those conditions.
The third is a deliberate design choice: founders sometimes prefer that a recipient only ever shares in growth from today, which the hurdle guarantees. The trade-off is complexity — growth shares are more bespoke and more expensive to set up than EMI.
How are growth shares taxed?
The appeal is turning what would be employment income into a capital gain. Because the growth shares are worth little at the hurdle, there is little or no value to tax on acquisition, so the income-tax exposure up front is small.
To protect that position, recipients should sign a section 431 election within 14 days of acquiring the shares, fixing the tax on the full unrestricted value now so all later growth is a capital gain. Miss the 14 days and you cannot make the election. [More: What is a section 431 election and why does the 14-day deadline matter?]
Future growth above the hurdle is then taxed as a capital gain on sale. Note that, unlike EMI shares, growth shares do not get Business Asset Disposal Relief without the usual conditions — take advice on whether relief is available.
| Growth shares | EMI options | |
|---|---|---|
| What it is | A share class (owned now) | An option (right to buy later) |
| Who can hold | Anyone, including non-employees | Qualifying employees only |
| Company conditions | None specific | ≤£30m assets, <250 FTE, qualifying trade |
| Upfront value | Low (only above the hurdle) | None paid at grant |
| Key election | Section 431 within 14 days | N/A |
| Tax on growth | Capital gain above the hurdle | Capital gain; BADR without 5% test |
| Setup | New articles + valuation | Scheme rules + HMRC valuation |
Worked example
Marcus runs Tallowe, a foodtech startup currently worth about £2m, and wants to reward Priti, a part-time advisor who cannot receive EMI because she is not an employee. He creates a growth-share class with a hurdle of £2.4m — 1.2x today's value.
Priti subscribes for growth shares entitling her to 2% of value above the hurdle, at their low current value, and signs a section 431 election within 14 days. Two years later Tallowe is acquired for £6m.
Value up to £2.4m goes to the ordinary shareholders; the £3.6m above the hurdle is shared, and Priti's 2% slice is £72,000. Because she signed the election and holds real shares, that £72,000 is taxed as a capital gain rather than as consultancy income.
Where founders go wrong
Missing the 14-day section 431 window.
Without the election, later growth can be taxed as income; the deadline is hard and cannot be extended.Setting the hurdle too low.
A hurdle at or below today's value gives the growth shares real worth now, creating an upfront tax charge and undercutting the point.Skipping a proper valuation.
HMRC can challenge a growth-share value that is not defensible, so the hurdle and initial value need evidencing.Forgetting they are real shares.
Growth shareholders join the cap table with rights — think about voting, drag-along and leaver terms before issuing.
Related questions
How are growth shares different from ordinary shares?
Growth shares only participate in value above a set hurdle — usually pitched a little above the company's current value, such as 1.2x. Below the hurdle they are worth almost nothing, so ordinary shareholders keep the value built up to date, and growth shareholders share only in future upside. [More: What is an EMI share option scheme?]
Why use growth shares instead of EMI options?
Because EMI is limited to qualifying employees and qualifying companies. Growth shares can go to anyone — contractors, advisors, non-executive directors — and work even where the company has outgrown EMI or fails the trade test. They are the flexible alternative when EMI is off the table. [More: Can contractors or advisors receive share options?]
Are growth shares tax-free?
No, but they can be tax-efficient. Because they are worth little at the hurdle, the upfront value is low, so there is little or no income tax on acquisition — especially with a section 431 election. Future growth above the hurdle is then taxed as a capital gain rather than income. [More: What is a section 431 election and why does the 14-day deadline matter?]
Do I need a section 431 election for growth shares?
It is standard. Growth shares are usually restricted securities, so recipients should sign a section 431 election within 14 days of acquiring them to fix the tax on the unrestricted value and keep future growth in the capital-gains regime. The 14-day deadline cannot be extended. [More: What is a section 431 election and why does the 14-day deadline matter?]
What do growth shares require to set up?
New articles of association to create the share class and define the hurdle, a defensible valuation of the growth shares, board and shareholder approvals, and section 431 elections for each recipient. They are more bespoke than EMI options and usually need legal and tax input. [More: EMI vs unapproved options — what's the difference?]
Growth shares are powerful but bespoke: the hurdle, the valuation, the new articles and the 14-day election all have to be right, and a slip can turn a capital gain back into an income-tax bill. A SuLe solicitor can design the class, evidence the valuation and get the elections signed in time. Book a free call about your option scheme and structure it properly from the start.
Keep reading: What is an EMI share option scheme? · Can contractors or advisors receive share options? · What is a section 431 election and why does the 14-day deadline matter? · EMI vs unapproved options — what's the difference? · What is a CSOP and when does it beat EMI? · Should advisors get equity — and how much?
Primary sources: GOV.UK — Enterprise Management Incentives (EMIs)
