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Flowering Shares and how do they work? - 23 September 2020

RMcH states: Flowering Share is the term used to describe a unique class of ordinary shares that companies can issue. This share structure initially holds little or no value but will benefit employees as they can own low-value shares that can flourish and hold much more value over time with great tax benefits.

Why Would a Company Adapt the Following Share Structure?

Companies may adopt this share structure as it focuses on the growth of the company over a period rather than its initial value. The company may not see a significant growth spurt but will exit with high-value shares.

A company that adopts this structure is obligated to reach a certain target or threshold; this target is known as the ‘hurdle’. This will ensure that the shares cannot be sold as profit unless the company exceeds its set target.

This scheme provides many options that companies can utilise. The company can set a plan to limit employees’ rights to vote and ensure that the shares are worthless and hold no value until the target is met. This creates employee motivation and development to reach targets set out by the Directors.

The company can also decide to include ‘Leaver Provisions’ in the Constitution before incorporation, or a shareholder agreement after incorporation. The purpose of these provisions is to protect the shares, should an employee leave the company. The leaver provision will disallow ex-employees from gaining any benefit from the scheme if they are discharged from the company. The plan, however, will also award the employees if they have no choice but to leave the company for example, if they fall ill or become redundant.

It should be noted that employees will be taxed Capital Gains Tax (CGT) rather than income tax rates. This can be beneficial for employees if they sell their shares for profit as they will likely be taxed at a lower rate.

What Company Types can Avail of this?

Any company can create and avail of this share class, but it is commonly adopted by new start-up companies as they sometimes experience an initial growth spurt. A start-up company would avail of this share structure as a way of encouraging employees to reach targets as the employees will too reap the rewards the share scheme has to offer. If a company experiences high level of growth, this structure may suitable as it is a way of awarding employees when targets are achieved.

Benefits of the Flowering Share Scheme

There are many benefits of adopting this share scheme, which include:


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