Recruit, retain and incentivise the best

EMI Share Options - What are they?

The Enterprise Management Incentive (EMI) is a tax-advantaged share option scheme allowing employees of small companies to buy shares in the company at a fixed price at a future date.

EMI is the most widely used and most efficient method of employee ownership in the startup world. The scheme grants employees options to buy shares in the future for a price determined today, known as the Exercise Price. The Exercise Price will be agreed with HMRC at a significant discount to the ‘real world’ value of the shares.

The advantage of this is: under a qualifying scheme the only tax arising is Capital Gains Tax (at a reduced rate of 10% if the option is held for more than 12 months) on the eventual sale of the shares.

This means employees have a vested interest in increasing the value and performance of the company, while the company gets to offer an attractive employment package to current and future team members.

When do I do it?

To agree the lowest possible valuation with HMRC, start the process as early as possible and certainly before your next funding round. The lower the valuation agreed with HMRC, the lower the Exercise Price can be set by the company and the greater the potential uplift (and incentive!) for the employees.

How do I do it?

To grant qualifying EMI share options there are a few key steps:

  • First agree the size of the option pool to decide on the total share allocation that employees will receive. The valuation needs to be agreed with HMRC before doing anything else – they need to sign off and approve this.

  • Once the valuation is approved, the shares are then granted to employees by way of an option contract within 60 days of HMRC’s approval of the valuation.

  • The company then has 92 days from issuing the options to register these options with HMRC.

What are the common pitfalls?

Failing to meet the appropriate deadlines means that the EMI conditions are not met and the options are automatically treated as non tax-advantaged share options.

  • Not agreeing the EMI evaluation well in advance of your next funding round (at least three months).

  • EMI Share Options can only be granted to qualifying employees (working at least 25 hours a week or 75% of their time, if less, for the company). Contractors and Advisors cannot be granted EMI share options but, none approved schemes can be used.