Intro to EMI

About the plan

The Enterprise Management Incentive (EMI) is a government-backed share option scheme. The EMI plan allows UK businesses to offer stock options to their team in a way that’s tax efficient for both the employees and the company. The goal of the plan is to help startups recruit and retain talent effectively.

‍

‍

Asset type

Stock options give their owners a right to buy company shares in the future for a fixed price (called exercise or strike price). The right to exercise options is typically subject to a vesting period. Once the employee exercises their options, they become the company’s shareholder.

Best for

The EMI plan is perfect for small and medium UK-based companies with a substantial number of UK-based employees.

‍

‍

Employee rights

EMI stock options holders don’t have any shareholder rights (like voting power or right to dividends) until exercise. After exercise, the options holder becomes the company’s shareholder with all associated rights.

‍

‍

Cap table effects

When options are granted, they don't immediately affect the cap table. But you should always include the options in the so-called fully diluted cap table, which assumes the exercise of all options and conversion of all convertible instruments into equity. You’ll need the fully diluted cap table for communication with investors and during the investment due diligence process.

‍

After exercise, the employees become company shareholders. As a result, the total number of outstanding shares rises and the existing shareholders are diluted.

‍

‍

Payout

EMI stock options aren’t liquid until they’re exercised and converted into shares. The exercised shares can be typically sold during an exit, secondary sales attached to investment rounds or other liquidity events.

‍

Taxation

The EMI plan is hugely tax efficient for UK-based employees. There is no tax on grant or exercise if the options are given at a price that is at least equal to their market value at grant. After exercise, the sale of EMI shares is taxed as capital gain at 10 %.

‍

But taxation laws vary across countries. Make sure to consult tax professionals to confirm the exact treatment in your location. If you need any help, schedule a call with our legal team here.

‍

‍

Implementation steps

1. Establish eligibility: Make sure your business is eligible for EMI. For more details on this, check out the Something extra section below.
2. Fix company valuation: You should file for company valuation with the HMRC (HM Revenue & Customs).
3. Authorize ESOP pool: Create and approve the pool for your EMI stock options.
4. Design the plan: Define plan parameters like eligibility, vesting, payout events etc. 
5. Draft and approve documents: You’ll need an EMI option agreement including terms, conditions and exercise price.
6. Give awards: Sign award agreements with employees.
7. Register with the HMRC: You’ll need to register your EMI plan and the grants with the HMRC within 92 days.
8. Inform your employees: Educate employees about the plan, its benefits and tax treatment
9. Manage the plan: Make new awards, manage leavers and keep track of vested assets. Also make sure you comply with your ongoing reporting obligations.

‍

Pros & cons

Pros:

• Tax-efficient for UK employers and employees
• Easy and flexible setup for UK-based companies
• Allows employees to become company shareholders (after exercise)

Cons:

• Limited to companies that meet eligibility criteria
• Different tax treatment for non-UK employees and contractors

• Regular and accurate valuation needed to get tax benefits

‍

Something extra

A company will typically qualify for EMI if it meets the following criteria:

• has max 249 full-time employees worldwide
• gross assets don’t exceed £ 30 million worldwide
• isn’t majority-owned or controlled by another company (it has an independent status)
• isn’t active in one of the excluded industries, including: banking, farming, property development, provision of legal services, shipbuilding or leasing

For a full and up-to-date list of eligibility criteria, check the HMRC website.