Growth shares
Growth shares are a unique class of ordinary shares with restricted rights. Their key feature? They hold no value until a specific valuation threshold is surpassed. This means recipients only benefit from value created above this hurdle, rather than from pre-existing company worth.
What’s special about them is that they’re effectively worthless until a valuation hurdle is exceeded. What that means is, unlike with plain ordinary shares, the recipient only benefits from the value they help to create above that hurdle.
This structure allows companies to reward individuals for their contributions to growth after joining, without sharing previously created value.
Heads up! Growth shares are usually not suitable for mature companies. They’re designed for early-stage startups where significant value creation is still ahead. Established firms with substantial existing value may find growth shares less effective for employee incentivization and could face complications in implementation.
Stock options
Stock options are popular equity incentives, granting employees the right to purchase company shares at a predetermined price. They become valuable when the company’s share price exceeds this “strike price,” allowing holders to profit from the difference.
This mechanism aligns employee interests with company growth, as the options’ value increases with the company’s success. It offers a potential for significant rewards without immediate dilution of existing shareholders.
Stock options provide flexibility in vesting schedules and exercise periods, allowing companies to tailor incentives to their specific needs and retention goals.
Stock appreciation rights
Stock Appreciation Rights (SARs) are cash-based incentives that mirror stock price appreciation without actual share ownership. SARs grant employees the right to receive the increase in value of a specified number of shares over a set period.
This structure provides employees with the economic benefits of stock ownership without the complexities of actual shareholding. When exercised, employees receive the difference between the grant price and current market value, typically in cash or shares.
SARs offer flexibility in design, including performance-based vesting conditions, and can be settled in various ways to align with company goals and cash flow considerations.
Recommended for established firms! SARs are particularly well-suited for mature companies with stable cash flows. They provide a compelling incentive tied to company performance, while avoiding dilution of existing shareholders and simplifying administration compared to traditional stock options.