Could Enterprise Management Incentive (EMI) share options be right for you?
EMI share options tend to be a popular option for founders of fast-growing businesses as an effective way to remunerate staff in cash-strapped start-ups - and they also offer the added bonus of aligning staff to a common goal of building value in the business.
First things first. What’s an EMI?
Enterprise Management Incentives (EMI) are government backed, tax advantageous share options for employees.
The scheme is designed for employees or directors working more than 25 hours per week (75% of their time) in a business. Options are generally more beneficial than shares because no tax is paid when they’re granted – only when they’re exercised.
What about a share option?
A share option gives the holder the right to buy shares in that company in the future at a specific price.
How is the price of a share option set?
The price of a share option is set when the option is issued – normally the value of the share today.
That price is known as the exercise (or strike) price.
The idea is that, when the shareholder ultimately buys the shares (known as exercising the options), the value of those shares is much higher than the exercise price they’ve agreed - so there’s immediate value on the difference between those two numbers.
Share options v EMI share options
An EMI share option scheme is the most tax–efficient share option scheme for both the business and their employees and is specifically geared towards SME businesses.
What are the benefits of EMI share options?
Key benefits of EMI share options for businesses and business owners are:
- the cost of setting up and running an EMI scheme can be deducted from your taxable income for corporation tax purposes
- you can deduct the gain on the shares between the grant and the date of exercise from your taxable income for corporation tax purposes, and
- there's no employer’s National Insurance payable on any of the benefit your staff receive.
Key benefits of EMI share options for employees are:
- there's no income tax or National Insurance payable when the options are granted or exercised – only when the shares are eventually sold, and
- the increase in value is taxed as a capital gain rather than income tax and, provided the options are held for a certain period and other conditions are met, at a reduced Capital Gains Tax rate (10% rather than 20%).
How do Share Options work?
Is my company eligible for EMI share options?
To offer EMI share options, you need to be a UK based, trading limited company (not controlled by a parent company), have gross assets less than £30m and fewer than 250 employees.
Which employees are eligible to join an EMI share options scheme?
To be eligible, staff need to be an employee of the business or subsidiary, spend at least 25 hours a week or 75% of their time working for you and not hold more than 30% of the company.
When can employees exercise their EMI share options?
That's entirely up to you. Some schemes are written so that employees are only able to exercise their options when the company is sold, and some are written to allow employees to own shares in the company, potentially after they've met certain performance criteria.
What if employees in an EMI share option scheme leave the company?
When setting up your EMI share options scheme, it's worth thinking about what happens to options or shares if a member of staff leaves. This could include rules around good/bad leavers and buy-back schemes. There's a lot to consider here, so it’s worth getting advice early.
How do I prepare an EMI share options scheme?
To set up an EMI share options scheme you will need to draft the rules governing the mechanics of the scheme, plus an options agreement which is the contract between the company and the employee.
These are legal documents and normally drafted by a lawyer.
On top of this, you need to prepare a valuation of the shares, manage a cap table to make sure that the structure is tax compliant for EMI status, and then complete the administration requirements.
As well as getting legal advice, you’ll also need input from both finance and tax specialists, so nothing slips through the net. It also helps to work with one party who can help manage all the other parties to make sure that everything is administered correctly – that’s how we help our clients at flinder.
Summary
In summary, EMI share options can be an effective way to remunerate staff in a cash-strapped start-up and align key staff to a common goal of building value in the business.
It works. We’ve seen it first-hand. We worked with a business on a structured journey to exit, including shifting the business model from a pure services company to a recurring software business. When we talked about the increase in value this would create, we could see how engaged and focused the whole team were as they knew they would all receive a share of the value they created.
It’s an appealing option for founders but not straightforward to set up. There are lots of things to think about, so you need to work through the implications with someone with experience.
