EMI - retain and reward key staff with share options

The best choice for employee share option incentives

EMI SHARE OPTION SCHEMES ARE OUR CORE BUSINESS

The EMI share option scheme is a Government approved, tax beneficial and very flexible way of incentivising your staff. In a nutshell, EMI is the best type of share scheme for employees and the company.

SO WHERE DO YOU START?

  • If you want to understand more about options, EMI and whether it’s the right fit for your company there is lots of information in our Introduction - just scroll down the page
  • See our introductory Videos

OUR OFFER TO YOU:

  • We make the process as easy and as painless for you as possible, minimising paperwork and complexity
  • Help and guidance supplied throughout 
  • We cover everything you need to set up your scheme – legal documents, share valuation and HMRC approvals – and we do it in 5-6 weeks 
  • Value for money – our fixed fee is £2,995 and you can spread the payments by direct debit if you wish 
  • Professional approach – we are chartered accountants
  • Total confidentiality
  • We have set up well over 250 EMI Schemes 

If you want to contact us straight away – call Jerry Davison on 01392-432654 or email jerry@millconsultancy.co.uk

SOME USEFUL BLOGS TO BEGIN WITH?

OTHER SHARE SCHEMES

Most companies will be eligible to set up an EMI scheme but if you’re not, there are a few alternatives, including growth share schemes and CSOP.

Introduction to EMI

A share option agreement gives someone the legal right to buy a company’s shares in the future, but at a price that is fixed today. If the value of the company increases over time, the option holder could make a significant profit when they sell their shares, which make options very useful for companies that want to incentivise key employees.

Option schemes are very popular with early stage entrepreneurial companies who can offer share options to help them employ talented staff. Many more established businesses also use option schemes to attract and retain key people. The chance to buy shares, to be a stakeholder and benefit in the company’s growth alongside the owners is a powerful motivation when offered in addition to the usual salary package. Aside from the modest set up costs, there are no cash costs associated with share options, so they’re not a drain on resources.

An EMI (Enterprise Management Incentive) share option scheme provides significant tax advantages to employee option holders and substantially boosts the incentive value. Put simply, an ‘EMI’ scheme is by far the most tax beneficial structure for staff.

The EMI was introduced in 2000 to assist growing companies in attracting and retaining key employees and to reward those employees for taking the potential risk to work for such companies.

The main tax benefit of an EMI scheme is that employees do not have to pay the income tax that would normally be charged on the market value of any shares or options granted to them. If employees are given options under an approved EMI, they are only charged capital gains tax at 10% on the increase in value over what they pay for the shares (the option's 'exercise price'), so long as that price is at or above the market valuation of the shares on the date of granting the options. 

This value is agreed upfront with HMRC as part of the process. Please see the infographic below which illustrates the benefits, and have a look at our FAQs which explain everything in more detail. There are also some explanatory videos below or here. 

Alternative schemes other than EMI are discussed here.

How does an EMI scheme work?

Shares awarded

Jim is granted options worth £3k at a value agreed with HMRC.

Tax

Under an EMI scheme Jim would be charged 10% capital gains tax on any profit only when he sells the shares. Without an EMI scheme he would be charged PAYE of up to 45%.

Increase in value

The value of the shares rises to £50k.

Shares Sold

When the shares are sold, Jim makes a gain of £47k net of the cost of his shares. Under an EMI scheme he would pay under £4k in tax. Without the EMI scheme Jim might have to pay out over £21k.

Flexibility

There is a lot of flexibility for designing an option scheme and it’s best to discuss this with us. You can structure the timing of when staff can ‘exercise’ their options and buy their actual shares in all sorts of ways, for example they could be allowed to buy their shares immediately, over a period or on a sale of the company. To protect the business, most schemes provide that if an employee leaves the company, then they automatically lose their options or shares, although this can be subject to the board’s discretion. The option shares can be a different class of ordinary share that could for example be non-voting and subject to buyback if the employee leaves. The option will be formalised in a legal contract, which will include all the necessary rules and conditions.

Some of the matters to consider when designing an EMI scheme will include the following, all of which we will help you with:

- Which employees should get EMI options?

- How many EMI options should be granted?

- What price should be paid for the shares?

- Should there be any performance criteria for vesting?

Real examples of EMI scheme structures

There are three key terms you need to understand for option schemes:

‘Grant’ – the award of the EMI share options to an employee

‘Vest’ – means the date from when the option rights can be ‘exercised’ i.e. when the employee can actually buy the shares.

  • A company granted options over 10% of its shares between two senior execs. The options were structured so that they vest over the following two years, with half of their options each vesting on the first and second anniversaries of the date of the grant. The ‘exercise price’ (the cost per share) was set at the market value agreed by us with HMRC.
  • Another company granted options over 5% of its shares to its new MD. The options vested immediately, on the date of grant. The exercise price was set at the market value agreed with HMRC.
  • A company granted options over 15% of its shares between five key staff, with vesting permitted only on the date of an exit event (i.e. the sale of the company, which could include a management buy out or flotation). This type of vesting structure is very popular with clients because i) it focuses everyone on building value towards a sale and ii) it avoids the admin hassles and other issues caused by having employee shareholders prior to an exit.
  • A founder shareholder had built his company to a point where turnover and profit were healthy and he was looking to exit in 3 to 5 years. He granted options over 20% of the business to his three key execs, with vesting allowed only on a sale of the company. The exercise price was set at the market value agreed with HMRC. However, the option holders would be issued with a different class of shares on an exit, and this enabled the founder to take the first £2 million of the sale proceeds, with all shareholders then receiving their proportionate share in excess of that amount. In this way, the founder reserved for himself some of the value he had built in the company. This structure entailed some straightforward amendments to the Articles of Association.
  • Fifteen employees at a software company were granted options of between 0.5% and 3% of the shares, depending on seniority and length of service. The options vested on an exit event. The exercise price was set at zero, whereas the market value agreed with HMRC was 50p per share. This is fine and just means that on an exit, when the shares are sold to the acquirer, the option holders will have to pay income tax on the first 50p of any gain per share, because the discount off the agreed market value is a taxable benefit. Then any gain over 50p per share is subject to capital gains tax at only 10%.

What are the main benefits of EMI options?

  • No income tax or national insurance is payable when EMI options are granted.
  • When option shares are sold the employee will be liable for capital gains tax (CGT), currently at the entrepreneur’s relief rate of only 10%, rather than income tax. The employee can also use their annual CGT exemption.
  • Options provide a very tangible incentive for key employees to stay with the company. The prospect of a rewarding capital return within a foreseeable period strongly encourages retention of staff, especially as most option agreements provide that options lapse automatically if anyone leaves.
  • It’s been shown that employees feel much more aligned with the interests of shareholders and the board if they have a tangible interest in the company’s ownership. It can be a great motivator if all stakeholders are working towards a profitable exit, with everyone focused on building shareholder value.
  • Share options make an employee feel more appreciated, because they’re a benefit that can be awarded alongside the usual salary package and one that focuses on the longer term. It says ‘we want you to stay with us and help grow the business, because we really value your input’.
  • The costs of setting up and administering the EMI will be deductible expenses for the company against corporation tax. Also, after exit, the net market value of the options exercised by employees may be an allowable expense, similar to expensing normal employee remuneration.
  • If the option’s exercise price is set at the same or a higher price than the agreed market value of shares on the date that the option is granted, then no income tax or NI is payable when the option is exercised. Companies may set the option price at a discount to the agreed market value (or even at nil). However, where this is the case then, on exercise of the option, income tax will be payable on the discount (the excess of the market value of the shares on the date the option is granted over the exercise price paid by the employee).

How we can help

The EMI Full Solution Package – everything you need to get your EMI scheme in place –

  • This is a 'one-stop service' - we cover all the legal and the tax/valuation requirements
  • All of the scheme agreement legal documentation you need - scheme rules, option certificates, board minutes, letters to employees
  • Your company share valuation carried out and agreed with HMRC
  • Advice and in-depth discussion with our specialist on how to best structure your scheme
  • The fully inclusive cost is £2995 + vat.
  • Add-ons: if you need some minor legal extras such as a new share class or amended Articles of Association we can execute this work as well - see the pricing schedule
  • Get in touch - call us on 01392 432654 or email office@millconsultancy.co.uk

We are a small company employing fewer than 20 people so the process of setting up a company share scheme was pretty daunting. The Mill Consultancy worked with us at every stage to make sure we understood the process and got the paperwork right. We’re proud of what we’ve achieved for our staff and couldn’t have got there with any degree of confidence without the expertise and patience of the Mill Consultancy.

PRIMER DESIGN

Our experience

We have set up well over 250 EMI schemes, and for all types of industry sector. It's one of our core activities and our approach is personable but highly efficient. Typically we can deal with the documentation by phone, post and email but if you would like a ‘full service’ basis, which would include face-to-face meetings (which can encompass presentations to staff for example) we are very happy to undertake this too.

There are other types of share schemes available but for most growing SMEs we consider that EMI is the best if the scheme is for your ‘key’ staff. If the scheme is for a larger number of employees, please let us know, as there are other forms of scheme,

such as the CSOP (company share ownership plan), or an ‘unapproved’ scheme for non-executives and non-employees that we can help you with.

Accountants

We have worked with a number of accounting firms to set up EMI and other schemes for their clients. Please contact Jerry Davison to discuss how we can work together.

We chose the Mill Consultancy to create our share scheme based on the all inclusive package (i.e. including the company valuation and having no hidden extras) and the price which was extremely competitive. We were very happy with our decision. Jerry at Mill Consultancy was fast and effective whilst always maintaining great communication and being happy to help with any questions we had. What to a small company had seemed a daunting task turned out to be a very smooth procedure indeed and all thanks to Jerry for that. It is very easy to recommend the Mill Consultancy to you for your EMI share scheme.

Rodney Higgins - CEO - VSR2 Limited

Jerry set up our EMI scheme and I can’t recommend him highly enough; he provided us with all the advice and documentation and dealt with HMRC to get us a heavily discounted option.

Cupris Software

Videos

1. Introduction to share options

How they work

2. Introduction to the EMI share option scheme

The basics and benefits of EMI

EMI share options: key issues and questions

I talk about key areas such as the design of your option scheme, which staff should get share options, how many each, and when they can actually buy the shares.

EMI schemes - are you eligible?

I explain the rules that define whether a company and individual employees are eligible for EMI.

Videos

EMI – exit only or time based vesting?

When you set up your EMI option scheme you need to consider when the employees can actually buy their shares.

EMI share options: share valuation

Agreeing the company’s share value upfront with HMRC is a vital step in the EMI process as it has a huge impact on the employee’s tax position.

Setting up an EMI share option scheme

In this video I describe the process of setting up an EMI share option scheme

Share options and company law explanation

Giving an employee share options in a company is one way a company can incentivise employees and align their interests with those of the business. However, there are certain company law and tax law issues that it’s good to understand before going ahead.

Some of our clients

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