Hurdle shares are specialised equity instruments in which an economic stake in a company is linked to the achievement of certain thresholds („hurdles“). They are primarily used in the context of corporate equity investments, management share schemes and high-growth companies.
The term „hurdle“ refers to a pre-defined target that must be achieved before certain ownership rights or economic benefits take effect.
Typical hurdles may include:
- a specific business valuation
- a defined enterprise value at the time of exit
- Turnover or profit targets
- achieving specific returns for investors
Hurdle shares are frequently used to align the interests of founders, management and investors.
Typical advantages of hurdle shares are:
- performance-related share in the company’s value
- An incentive for long-term value growth
- better alignment of the interests of all parties involved
- The ability to design participation programmes flexibly
A typical example:
If employees or co-founders receive hurdle shares with a threshold of 10 million euros in company valuation, they may only benefit from any increase in value that exceeds this threshold. The existing company valuation initially remains reserved for the original shareholders or investors.
In the start-up and venture capital sector, hurdle structures are frequently associated with:
- Management Share Ownership Schemes (MIP)
- ESOP-style schemes
- Private equity transactions
- Growth and exit scenarios
used.
As the specific structure of hurdle shares can vary considerably from a legal and economic perspective, the relevant contractual terms should be examined carefully. In particular, the definition of the hurdle, the calculation of the shareholding, and any dilution and exit provisions are crucial to the actual economic impact.
innoWerft helps founders to understand equity models, design incentive schemes strategically, and establish financing and equity structures in such a way as to promote sustainable growth and long-term value creation.