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