UK Law and Practice Contributed by: Dylan Doran Kennett, Michael Jacobs, Stephen Newby and Mark Ife, Herbert Smith Freehills LLP
on a later sale or lifting of restrictions. Founders will generally pay the unrestricted market val - ue for the shares (which at the inception of the company may be nominal value) to ensure that no tax charges arise – any discount would be chargeable to income tax and, possibly, National Insurance, depending on the holding structure of the company. 5.3 Taxation of Instruments Where key employees are to acquire shares at a later stage in the company’s development, care needs to be taken that those shares are acquired at the unrestricted market value; otherwise, an income tax, and possible National Insurance, charge will arise on the difference between the market value and the subscription price paid. Given that there may have been significant growth in value of the company since inception, where options are not being granted (for exam - ple, because it is desirable for the individuals to have shareholder rights, such as the right to dividends or voting rights), it may be appropri - ate to consider issuing a new class of “growth share” to such employees. Growth shares are a separate class of shares that have rights only to a proportion of the increase in the value of the company from the date of acquisition, rather than including value that has accrued prior to the date of issuance. Shares will therefore be issued with a company value hurdle, below which the shares will not participate in liquidation value. A valuation of such growth shares, taking into account the level at which the hurdle has been placed (which, in order to reduce the valuation, may need to be set at a premium to the compa - ny’s market value) will need to be undertaken to ensure, in order to avoid upfront tax, that shares are being subscribed at unrestricted market value. As described above, the employees will
generally have to enter into “restricted securities election” with the company to ensure that any liability for income tax is limited to the point of acquisition, and not on a later sale or lifting of restrictions. 5.4 Implementation When looking to establish an incentive arrange - ment for employees, the company will need to consider any restrictions that have been includ - ed in its articles of association or shareholders’ agreement in relation to dilution, pre-emption rights and requirements for shareholder approval or investor (director) consent. The establishment and terms of any share incen - tive arrangement will be negotiated between the company and its management, existing investors and any new investor at the time of an invest- ment round, and the proportion of share capi - tal that will be available to employees, and will therefore dilute investors, will form part of those negotiations. At later-stage investment rounds, where investors are acquiring preference shares rather than ordinary shares, the dilution will be after the return of capital and any associated coupon on the preference shares, and so inves - tors are able to set a minimum return by way of the preference coupon before employees share in the further accrued value.
6. Exits 6.1 Investor Exit Rights
The shareholders’ agreement and articles of association will detail exit provisions and trans - fer restrictions that govern shareholders’ rights in the event of an exit trigger such as an IPO, sale of the company, or winding down of the company. Since 2013, a total of 5,899 high- growth companies have exited in the UK via an
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