Share options enable you to grant a portion of ownership in your business to staff, which is a brilliant way to incentivise them and improve overall job satisfaction. For employees, the UK government has created a tax efficient way to grant share options to staff through what they call an EMI Scheme.
If you’re looking to implement your EMI Scheme, Legal Sidekick and Accelerate Law have partnered up to deliver you the most-efficient, semi-automated, semi-personal way of implementing your EMI Scheme. Get in touch for more info.
If you’re just looking for a quick crash course on EMI Schemes, here’s a guide to get you started.
EMI Schemes: What and Why?
An EMI Scheme is a tax-advantageous employee share option scheme which enables:
(a) Employers to incentivise loyalty and reward employees, and
(b) Employees to acquire shares in the company at a pre-agreed low value (the “exercise price”), and therefore share a piece of the pie and align their personal goals with those of the company.
Broadly speaking, an EMI scheme entitles employees who exercise options to buy shares to a 10% capital gains tax rate when they sell those shares, where usually it would be around 20%.
Share options don’t need to be offered via the EMI Scheme – this is just one option – but it is the best (in our opinion) and most common option for startups.
Step 1 – Check eligibility
A company and the relevant employees need to qualify for the scheme. More often than not though, if you are a young startup then you will qualify – we would usually run a quick assessment to ensure eligibility before implementing. Employees need to work for you for 25 hours per week or 75% of their working time (if part-time) to be eligible.
Step 2 – Apply to HMRC to approve valuation
We, or you accountants send a short letter to HMRC, stating that you wish to implement an EMI Scheme to enable your employees to acquire options to buy shares at a later date at the current valuation (which, if the company hasn’t turned over any money yet, could be £0.0001 per share, or whatever the shares were worth when you incorporated your company). Although when looking for investment, you are incentivised to create a high valuation to preserve your equity, when implementing an EMI scheme, you generally want a low valuation to enable your employees to acquire the shares in future for a lower amount. On the one hand, this means less money for the company when they exercise their options – but ultimately, the purpose of the scheme is to incentivise employees, not to receive investment from them beyond the time they have already committed to the growth of your company.
See Step by Step Guide – Getting an HMRC approved valuation for your EMI Scheme for more info on the valuations process.
Step 3 – Agree an option pool and how options will be distributed
Typically, option pools range between 5 and 20% depending on the type of company, the way the company is financed (e.g. investors may prescribe certain requirements) and the nature of the employees in question. We can help you strategise on how to distribute your share options, taking into account the long-term growth of the business.
Step 4 – Agree commercial details of the scheme
When can employees exercise their options? On an exit or beforehand? If beforehand, will there be a vesting schedule, and if so, over what period? If the employee leaves, can they still exercise their shares? If the employee stays but there is no exit after an expected period, is there a replacement incentive? There are many commercial options for an EMI Scheme which you need to consider before implementing it. We usually help our clients choose the most suitable option based on the long-term goals of their business.
Step 5 – Issue Share Options (within 90 days of HMRC approving the valuation)
This is where each employee signs their individual share option agreement, setting out all the conditions and commercial details of the scheme, and of course the number of share options they are being granted.
Step 6 – Registrations
The share options then need to be registered with HMRC within 92 days of issue, and the company should also register for ERS (employment related securities) through HMRC.
About Accelerate Law
Accelerate Law is a consulting business which was specifically created to provide legal support for startups. Accelerate Law help a number of startups throughout or at various points through the EMI scheme process. Contact us directly or via Legal Sidekick if you think we can help your business. Accelerate Law is a consultancy business providing in-house legal support to startups.
About Legal Sidekick
Legal Sidekick is a legal platform for startups specialising in shares, share options, EMI Schemes and various other startup legal areas. You can access this EMI Scheme Step by Step Guide and other startup legal documents and guides via our platform. Search the Encyclawpedia for the resource you need. If we don’t have it – please request it!