Starting an EMI share scheme

Article reference: UK-IA-EMP19
Last updated: September 2022 | 5 min read

Establishing an Enterprise Management Incentives share scheme within your business is a reasonably easy process. Here we break it down into four steps.

Indentify your goals

The starting point is to ask is what you want to achieve by offering employees share options in your company. Broadly, there are three reasons why you might want to set up an EMI scheme:

  • to allow employees to acquire shares in a tax-efficient way over a period of time
  • to 'lock-in' key employees until the point of a sale or until a key milestone is achieved
  • to reward past loyalty and value creation ahead of a sale

The benefits of employee share schemes can include increased motivation (and performance) and an alternative to remunerating employees with cash when cashflow is tight.

The greatest disadvantage that you should remember is that in giving share options, you could be giving up some control of the company. Your relationship with those people will change from employer/employee to co-owner. You need to be sure that you are happy that your employees might have greater knowledge about the company and possibly greater control.

You also need to consider whether granting share options fits with both your remuneration policy (with your employees) and with your dividend policy (with your fellow shareholders).

Decide on the value of the shares to be given and the rights attached

Next, you should decide what target cash sum you want employees to receive.

Alternatively if you do not envisage an exit, you might consider what may be paid out as dividends on the shares.

In order to achieve that cash sum, you need to work out how much the company might be worth when the options are vested, and again when they are exercised.

No-one can accurately project forward in terms of exit value and profitability, but you might consider ranges under different scenarios. 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

Valuing shares, especially small minority shareholdings in a private company, is a very subjective business.

Unless your case is very simple or you have a limited budget, it is a good idea to involve an accountant (with experience of private company sales and valuations) to act as your valuer.

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.

If you do so, you will know that you are within the relevant qualifying limits for an EMI scheme (£120,000 value of shares at grant per employee and £3 million 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.

A current valuation 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 employees may have to pay income tax on the difference between the price of the option and the price of the share. You can read more about income tax and national insurance contributions on EMI share schemes.

Once you have valued the company, you need to send form VAL231 to HMRC. You can do this yourself or ask your accountant to help.

Wait for HMRC to agree on the value (usually within two weeks)

HMRC will reply to your application.

Once HMRC has agreed the valuation, you can finalise the EMI option agreements with 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 agreement being signed. If you fail to do so the option will cease to qualify under the EMI scheme.

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