This article will be useful reading for any employer / business owner considering setting up an EMI share scheme. We have other articles on EMI share schemes and of course we stock the documents you require to get started. All are linked at the end of this page.
Your goals
The first question to ask is what are your goals in offering share options? Broadly there are generally three reasons why you might want to consider a share scheme:
To allow employees to acquire shares in a tax-effective way over a period of time: this can increase motivation and improve team performance. But ask yourself whether you are happy to share ownership and if this will work in terms of remuneration and dividend policy. Once the option is exercised the employee becomes a co-owner and their rights must be respected;
To lock-in the employee until the point of a sale (or IPO) or until a key milestone is achieved. Translating what would otherwise be cash benefits into future share rewards can be very beneficial for an early stage or fast growing company;
To reward past loyalty ahead of a sale: it is quite common for owner-managers thinking of a sale to want to ensure that key employees who have contributed to the value creation share in sale proceeds.
How much in cash can you afford to give to the employee?
Next, decide what target cash sum you want the employee to receive. Alternatively if you do not envisage an exit, consider what may be paid out as dividends on the shares.
You need to project forward in terms of exit value and profitability. Doing this can be a powerful tool for communicating the benefit of the scheme to employees. Beware, though, of setting unrealistic targets which may demotivate employees if not achieved.
Share valuation
Decide what value you place on the company and its shares now. Valuing shares, especially small minority shareholdings in a private company, is a very subjective business. With the right advisers this can give you plenty of latitude to achieve your goals.
It is not strictly necessary to agree a share price for the EMI options with HM Revenue & Customs. However, it is a very good idea to do so. That way you know that you are within the relevant limits (£120,000 value of shares at grant per employee and £3million in total for all option holders). Also if you want to grant options at below market value (which you can do) the amount of income tax to be paid on exercise of the option is known.
This is useful information for your employees and it can also be very important for you to know. This is because if the shares are what HMRC call “readily convertible assets” at the time the shares are acquired (e.g. because the company is to be sold), then the Company may have to operate PAYE.
So if you grant options at less than market value and they are exercised at the point the company is sold, PAYE will need to be operated on that undervalue.
Getting shares valued
A form Val231 needs to be completed and sent to HMRC. You can do this yourself or ask your accountant to help you do this. Unless your case is very simple or you have a limited budget it will be a good idea to involve an accountant (with experience of private company sales and valuations) to act as your valuer.
HMRC will often agree a value in as little as one to two weeks.
Once you have the valuation you can finalise the EMI Option Agreements for each employee. A form EMI1 will also need to be completed for each option grant. This must be completed, signed and sent to HMRC within 92 days of the date of the EMI Option Agreement. If you fail to do so the option will cease to be an EMI qualifying one.
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Do not provide a complete or authoritative statement of the law;
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