A discretionary scheme
The company’s existing ordinary share capital is reclassified into a combination of new preference shares and new ordinary shares. The existing shareholders then hold the preference shares which represent fully the existing value of the company at the time of the reclassification. The new ordinary shares are issued at very low value. The growth of the company from then on is represented in the value of these new ordinary shares that have the potential to rise in value considerably with the ongoing growth of the business. All future growth following the share reclassification attaches to the new ordinary shares. Typically, the existing shareholders, as well as owning 100% of the new preference shares will own, say, 80% to 90% of the new ordinary shares. The remainder of the new ordinary shares will be issued to the employees and all increase in value will be taxed under the more friendly capital gains tax regime.