EMI - the Enterprise Management Incentive scheme

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 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 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

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.

We have set up well over 200 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,

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.

• 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.