UK Founder Series: When EMI and CSOPs Don’t Fit: Unlocking the Power of Growth Shares and JSOPs


12 minute read | June.26.2025

Orrick's Founder Series offers monthly top tips for UK startups on key considerations at each stage of their lifecycle, from incorporating a company through to possible exit strategies. The Series is written by members of our market-leading London Technology Companies Group (TCG), with valued contributions from practitioners across Orrick’s recognised practice areas. Our Band 1-ranked London TCG team successfully completed over 350 financings and tech M&A transactions in 2023 & 2024 totaling $5B+ and has dominated the European venture capital tech market for 37 quarters in a row (Pitchbook, Q1 2025). View previous series instalments here.

Later-stage startups that have grown with substantial backing from venture capital firms are less likely to qualify for tax-advantaged Enterprise Management Incentive (EMI) schemes and Company Share Option Plans (CSOPs). In addition, certain non-employees – like consultants and non-executive directors (NEDs) – do not qualify for EMI or CSOP options. In these cases, growth shares or Joint-Share Option Plans (JSOPs) offer a tax-efficient alternative for incentivising staff. In the thirty-first instalment of Orrick’s Founder Series, our Incentives team and Technology Companies Group share their top tips for designing and implementing these bespoke incentive arrangements.

1. Understand the basics of growth shares and JSOPs.

Both growth shares and JSOPs are tax-efficient incentive structures. Growth shares are a special class of shares that only deliver value to their holders once the company achieves growth above a specified threshold value, or “hurdle” (hence, they are sometimes referred to as “hurdle shares”).

These shares typically limit the value paid out to the growth shareholder on an exit event to a level which is set at or above the value of the company at the time of their issuance. This structure effectively protects existing value for current shareholders and investors from the time of implementation – preserving the “family silver” – while incentivising employees and consultants to drive future growth.

JSOPs are similar to growth shares in terms of their overall effect: the participant should not receive value above a certain level on a return of capital. However, the setup and structure of a JSOP is entirely different from growth shares, which may offer distinct advantages (explained further below).

2. Identify eligible recipients for growth shares.

Unlike EMI and CSOPs, growth shares can be issued to both employees and non-employees, including non-executive directors, consultants, advisors, employers of record employees, and third parties contracting via personal service companies (subject to applicable local laws).

Because growth shares involve the upfront issuance of shares to individuals – rather than the option to acquire shares in the future – and are more complex to explain and implement, they are typically reserved for more senior staff.

3. Structure for capital gains tax treatment.

Like EMI and CSOP options, growth shares can benefit from favourable capital gains tax (CGT) treatment upon their sale, rather than the higher rates of income tax typically applied to unapproved option plans.

This is because, in tax terms, growth shares are classified as “restricted shares”. For a UK employee or director to achieve CGT treatment, the individual must either:

a) acquire their shares at their unrestricted market value; or

b) elect to pay tax on the unrestricted market value of the shares at issuance.

Provided one of these routes is taken, capital gains tax will arise (currently at a rate of 24% for the 2025/26 tax year) upon sale of their shares. The individual should also typically enter into a Section 431 election under Income Tax (Earnings and Pensions) Act 2003.

What this ultimately means is that for a growth share arrangement to be both tax-efficient and to make economic sense, the upfront value of the shares should be as low as commercially feasible. This brings us on to the next key consideration in getting growth shares right: valuation.

4. Get the valuation right.

Accurate valuation is critical when issuing growth shares. This is especially true because, unlike EMI and CSOP options, companies cannot agree the market value of growth shares in advance with HMRC. This means there's no formal confirmation that the company's valuation will withstand HMRC scrutiny. To mitigate this risk companies should:

  • Obtain a professional valuation from an experienced expert;
  • Retain all supporting documentation, including valuation reports, relevant board minutes and underlying financial data; and
  • Be prepared to justify the valuation in later due diligence exercises (e.g., during funding rounds, at exit, or in the event of an HMRC enquiry).

Notably, if an individual still qualifies for EMI and CSOP options, it is possible to grant such options over growth shares. This offers two key benefits:

  1. the company can obtain a formal valuation from HMRC; and
  2. it can maximise the individual grant limits (currently £250,000 for EMI and £60,000 for CSOP), given the upfront market value of the shares is lower.

The main way valuation experts look to decrease the upfront value of the shares is by increasing the hurdle. So, there is often a delicate balancing act between implementing a hurdle which is robust enough to ensure the upfront market value of the growth share is affordable, yet not so high that the growth shareholders would not realistically participate in the net sale proceeds were an exit to happen. If the market value of the shares looks to be expensive it is possible to loan employees money to either acquire the shares or pay the tax upfront, but this comes with a raft of legal and tax implications which must be carefully considered that are outside the scope of this note.

Communication between your lawyer and valuation expert is key to getting the valuation right, as explained further below.

5. Amend company articles.

The company’s articles will require amendment to introduce the new share class, unless of course a growth share arrangement is being implemented upon incorporation (which is rare but can happen where a company does not qualify for EMI or a CSOP due to a large initial investment or where non-employees require a tax-efficient arrangement). Amendment to the articles will require shareholder approval.

Amending the articles at a later stage in a company’s life cycle can lead to some legal challenges, including:

  • Waterfall/setting the hurdle: when introducing growth shares with a hurdle into a UK company’s capital structure that includes a liquidation preference, the main challenge is how the hurdle interacts with the preference stack (i.e. where the growth shares sit in the distribution waterfall). Of course, investors will expect their liquidation preference to be respected – ensuring the preferred holders receive their return before the growth shares are in the money. It's also possible to build a performance criteria into the hurdle/threshold, e.g. a multiple on invested capital returned or an EBITDA target. Given that ambiguity in drafting of the waterfall can lead to disputes on an exit, and because the valuation expert needs to be clear as to when the growth shares become valuable, it’s fundamental that this point is understood and correctly documented before the valuation obtained and the articles are adopted.
  • Drag-along rights: it’s important that growth shares are explicitly subject to drag-along clauses in articles, which allow majority shareholders (typically investors or founders) to force minority growth shareholders to sell on the same terms in an exit. When incorporating growth shares into drag-along provisions, it’s important that growth shares are only entitled to proceeds to the extent their hurdle is met.
  • Voting rights: it’s relatively unusual for employee-held growth shares to carry voting rights. Growth shares may have limited class consent rights. This is to ensure the founders and investors retain control – as growth shares are, after all, economic incentives and not simply tools for governance influence. Having said this, if you wish for the growth shares to count towards the 5% voting threshold for Business Asset Disposal Relief (currently at a lower rate of CGT at 14% for 2025/26 tax year), then having voting rights with respect to growth shares can be advantageous from a tax perspective.
  • Rights to dividends: typically, no entitlement to dividends is achieved at all, although this could be drafted such that dividends are payable when the hurdle is met.

If amending the articles is problematic, JSOPs provide an alternative structure which mirrors the economics of growth shares (see section 9 below).

6. Use reverse vesting for retention.

Because growth shares are issued at the outset – unlike options which vest before shares are acquired – it's important for companies to implement a reverse vesting schedule. Under this model, recipients own the shares from day one, but risk losing or forfeiting them unless they “earn” them by remaining with the company over time.

The vesting schedule is called “reverse” because unlike an option grant, ownership of the growth shares exists from day one, and the risk of losing shares decreases over time. The greater the number of shares that are vested, the greater the number of shares that are retained (and no longer subject to risk of forfeiture). The vesting schedule assists with employee retention as it rewards growth shareholders to remain with a company. Just as with share options, it is market standard for venture-backed startups to apply time-based vesting over a four-year period for growth shares, where no shares vest during the first year (known as the “cliff”), and thereafter “linear” vesting monthly over the next three years.

7. Include robust leaver provisions.

Leaver provisions determine what happens to growth shares when employees leave a company or consultants stop providing services. UK market practice increasingly defines a good leaver as anyone who departs other than for “cause” (i.e. gross misconduct or fraud) or who resigns to work for a competitor, which follows the US market position.

A bad leaver will typically forfeit both unvested and vested shares. Good leavers are generally allowed to retain their vested shares until an exit event. Forfeiture of the shares is complicated and can either be implemented via a company buy back, forced sale to a third party or employee trust, or by converting the shares into valueless deferred shares (which is the simplest but requires adding a new deferred share class to the articles at the time of amendment).

8. Plan for exit events and IPOs.

The company’s articles should specify what happens to growth shares on a return of capital – typically a sale of the majority of shares to a third party, a majority asset sale, or a liquidation. In such cases, net sale proceeds are paid out in accordance with the waterfall set out in the articles. This means growth shareholders receive value only if the hurdle or threshold is exceeded, based on the equity value of the company at the time of a sale or liquidation.

In the event of an IPO, the vested portion of the growth shares could convert to ordinary shares and the unvested portion convert to unvested ordinary shares. Alternatively, companies may calculate the net proceeds by taking the IPO price per share and multiplying that by the number of shares in issue prior to the IPO. This resulting value is then distributed to the holders of growth shares, along with other shareholders.

9. Consider JSOPs as a flexible alternative.

Unlike growth shares, JSOPs do not require alterations to company’s share rights or articles. They can use ordinary shares or an existing share class to mirror the economic outcome of growth shares – i.e. employees benefit only from the growth in value of the ordinary shares above a threshold, with the aim of achieving capital gains tax treatment. In this arrangement, a third-party trust (which is usually an offshore professional trust) and the employee jointly acquire and own shares in the company. The joint ownership agreement outlines the ownership split and how sale proceeds will be divided when the shares are sold. The agreement between the trust and employee can be designed to restrict voting rights and rights to receive dividends. Although JSOPs avoid the need for amendments to articles, they can be relatively costly to operate when a professional third-party trust is employed. They also require careful implementation to ensure they work from a tax and legal perspective.

10. Follow a clear implementation roadmap.

Implementing growth shares or JSOPs involves several key steps:

  • Engage a valuation expert and determine the right hurdle – this should be step one, as it will determine whether the arrangement is economically viable
  • Amend the company’s articles to implement the new growth share class (and potentially deferred shares to allow for forfeiture)
  • Obtain investor consents and shareholder approval to amend the articles via resolutions and board approval
  • The company and employee enter into a subscription agreement to allow the employee to subscribe for the shares
  • Consider whether a loan arrangement is needed to fund the subscription of the shares (as noted above this comes with a myriad of legal and tax complexity)
  • Ensure relevant tax elections are entered into (in the UK these are known as Section 431 ITEPA elections and need not be filed)
  • Issue the shares and file the appropriate Companies House forms.

Conclusion

While EMI and CSOPs remain popular and tax-efficient tools for incentivising employees, they are not always available or suitable for every company, particularly those that exceed qualifying thresholds or that operate under more complex ownership structures. Growth shares and JSOPs offer flexible alternatives that can be tailored to align incentives with company performance without diluting existing equity in the same way as traditional share option schemes. By carefully structuring the terms of growth share agreements – especially around valuation thresholds, performance hurdles, and leaver provisions – companies can design bespoke arrangements that attract and retain key talent while managing long-term equity outcomes.

If you're considering alternatives to EMI or CSOPs, Rebecca Servian or another member of the Orrick team to discuss how these bespoke arrangements can be structured effectively for your business.