At Tollers we are often asked to design share structures for new shareholders coming into an established business when the new shareholder is not paying for the shares. The existing shareholders do not want to give up the value they have created in the company but would like the new shareholder to benefit from future growth.
The term “growth shares” is a loose label to describe the structuring of shares to allow a shareholder to benefit only from growth in the value of the company from the time the shares are issued. For example, if the company is currently valued at £1 million, the growth shares would participate in growth above £1 million.
The term “hurdle shares” is used for a share structure where the shareholder benefits from growth in the value of the company above a hurdle which exceeds the current value of the company. For example, if the company is valued at £1m, then the new shareholder would only get the benefit if the valuation was above, say, £2m.
The term “flowering shares” is used to describe shares that allow shareholders to participate in the value of the company, if and when a specific condition is met. For example, exceeding a profit target or a sale price on the disposal of the company.
There are three main commercial rights that we normally look at when structuring growth shares: (1) dividends (2) voting (3) rights to the proceeds of sale of the share.
Dividends and voting:
Our team would normally suggest that a new class of shares is created for the company, and these shares are the growth shares such that the original shareholders will hold ordinary shares and the new shareholder will hold ‘A’ shares with different rights attached. One of the main reasons for this is to allow the directors to distribute a different dividend to each class of shares. A separate dividends policy in the Shareholders Agreement will specify the amounts.
Rights on sale of the company:
We normally recommend that the growth shares are entitled to a share of the purchase price once the Ordinary shareholders have received a defined amount (usually the valuate of the company at the point the A shares are issued).
If you need advice or guidance on the best share structure for potential new shareholders…Talk to Tollers on 01604 258558, our Commercial Law team is on hand to assist and guide you through the process of identifying the best share structure for your business.