Growth Shares Explained

Key takeaways

• Growth shares are structured so that the recipient participates only in company value above a pre-set threshold called the hurdle rate.
• The hurdle rate is set at or above the company's fair market value at issuance. Recipients benefit only from appreciation above this threshold, not from existing value.
• Growth shares typically do not pay dividends below the hurdle rate. Dividend rights, when included, are defined in the articles of association and generally apply only above the hurdle threshold.
• Growth shares are actual shares, not options. The recipient holds legal title immediately, which distinguishes them from ESOPs.
• The Companies Act, 2013 does not recognize growth shares as a distinct statutory instrument. Indian companies cannot issue a formally recognized "growth share" class in the way UK companies can.
• Attempting to replicate growth share mechanics through contractual restrictions on ordinary shares in India involves tax and legal uncertainty and requires specific advice from qualified tax counsel.

What are growth shares?

Growth shares are a class of equity instrument designed to give recipients a share in a company's future value, but only above a pre-agreed valuation threshold. They originated in the UK as a tax-efficient way to give employees a stake in future company growth.

The term appears increasingly in cross-border equity conversations involving Indian startups, particularly those with UK subsidiaries, dual structures, or foreign institutional investors familiar with UK compensation design.

Growth shares represent actual ownership in the company, as opposed to options which represent the right to acquire ownership in the future. They are structured so that the holder does not participate in the company’s existing value at the time of issuance. Instead, they only participate in value created above a pre-agreed threshold (the “hurdle”).

How the hurdle rate works

The hurdle rate is the valuation threshold above which growth share holders participate in the company's value. It is set at or above the company’s fair market value (FMV) at the time of issuance of the growth shares.

Here is how this works:

Suppose a company is valued at ₹10 crore at the time of issuance and a hurdle of ₹10 crore is set, the growth shares do not entitle the holder to any of the existing ₹10 crore of value. The growth shareholders only participate in any value created beyond ₹10 crore.

For example, if the company is later sold for ₹50 crore, other shareholders retain the first ₹10 crore of value, while growth shareholders participate only in the remaining ₹40 crore of incremental value created after issuance and above the hurdle.

Because growth shares exclude participation in existing company value, their FMV at issuance is typically low. Employees pay this FMV to acquire the shares, so no tax is due at acquisition because there is no immediate gain. If the shares were issued for free or at a discount to FMV, applicable taxes would arise.

Growth shares vs SARs 

Growth shares are fundamentally different from stock appreciation rights (SARs). 

SARs are purely contractual rights to receive the increase in value of shares over a base price, typically settled in cash or shares, and do not confer actual ownership in the company. 

Growth shares, by contrast, are actual shares held from issuance. However, the rights attached to those shares are structured to exclude participation in the company’s existing value and instead capture only post-threshold growth.

Growth shares vs ordinary shares

Ordinary shares are the standard unit of ownership in a company. They typically carry voting rights, dividend rights, and residual claims on assets in a winding-up, pro rata to the number of shares held. An ordinary shareholder participates in the full value of the company from the time of investment.

Growth shares, by contrast, are a separate class of shares structured so that the holder does not participate in the company’s existing value at the time of issuance. Instead, the rights attached to these shares—typically set out articles of association or a shareholders' agreement—limit participation to value created above a specified threshold (the hurdle). 

The practical consequence of this distinction is significant for cap table mechanics. 

An ordinary shareholder issued shares at a ₹10 crore valuation participates proportionately in the entire value of the company, including the ₹10 crore that existed before they joined as well as any future growth. A growth shareholder issued at the same time also holds shares from day one, but participates only in value created above ₹10 crore.

Voting rights may or may not be attached to growth shares, depending on the terms of issue. Many structures deliberately limit or exclude voting rights from growth shares to prevent recipients from accumulating governance influence disproportionate to the economic value they hold.

Growth shares and dividends

Growth shares do not automatically carry dividend rights, and many growth share schemes are deliberately structured to exclude dividend participation, at least until the hurdle rate has been exceeded.

The logic is the same as for economic participation generally: if the holder has no claim on existing company value, distributing dividends to growth shareholders before the hurdle is met would effectively transfer value that belongs to pre-hurdle shareholders. For this reason, most growth share structures either exclude dividends entirely or make dividends contingent on the same value threshold that governs capital participation.

Growth shares under Indian company law

Indian company law classifies share capital into equity (ordinary) shares and preference shares at the statutory level. Any further distinctions—such as variations in voting or economic rights—are implemented through the company’s articles of association.

This has a practical implication for Indian founders: a company incorporated in India cannot issue an instrument called a “growth share” as a legally recognised class in the same way a UK company can under its articles of association, using terminology embedded in UK tax and company law practice. However, the economic outcome of a growth share structure can be replicated in India through ordinary shares with contractual restrictions specifying that the holder participates in company value only above a defined threshold.

The critical question is how such contractual arrangements interact with the rights attached to shares under the Companies Act, 2013. Shareholder rights—such as voting rights, dividend entitlements, and rights to surplus on winding-up—are governed by a combination of the statute and the company’s articles of association. The articles may create different classes of shares with varying economic and voting rights, provided they remain within the framework permitted by law. However, any arrangement that seeks to contractually override mandatory provisions of the Companies Act, or is not properly reflected in the articles, would not be enforceable as a matter of company law.

The structuring and tax consequences of such arrangements should be carefully evaluated in consultation with qualified legal and tax counsel.

Growth shares vs ESOPs: A comparison for Indian founders

Both growth shares and ESOPs are designed to reward recipients for company value created after they join. The economic alignment is similar, but the structural differences are material.