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How to set up an EMI Scheme for startups – why, what and how

Accelerate Law helps startups implement EMI Schemes. Here’s some useful info on them to get you started:

What and Why?

An EMI Scheme is a tax-advantageous employee share option scheme which enables:

(a) Employers to incentivise loyalty and reward employees, and

(b) Employees to acquire shares in the company at a pre-agreed low value (the “exercise price”), and therefore share a piece of the pie and align their personal goals with those of the company.

Broadly speaking, an EMI scheme entitles employees who exercise options to buy shares to a 10% capital gains tax rate when they sell those shares, where usually it would be around 20%.

Share options don’t need to be offered via the EMI Scheme – this is just one option – but it is the best (in my opinion) and most common option for startups.

How? 

Step 1 – Check eligibility – A company and the relevant employees need to qualify for the scheme. More often than not though, if you are a young startup then you will qualify – we would usually run a quick assessment to ensure eligibility before implementing. Employees need to work for you for 25 hours per week or 75% of their working time (if part-time) to be eligible.

Step 2 –  Apply to HMRC to approve valuation –  We, or you accountants send a short letter to HMRC, stating that you wish to implement an EMI Scheme to enable your employees to acquire options to buy shares at a later date at the current valuation (which, if the company hasn’t turned over any money yet, could be £0.0001 per share, or whatever the shares were worth when you incorporated your company). Although when looking for investment, you are incentivised to create a high valuation to preserve your equity, when implementing an EMI scheme, you generally want a low valuation to  enable your employees to acquire the shares in future for a lower amount. On the one hand, this means less money for the company when they exercise their options – but ultimately, the purpose of the scheme is to incentivise employees, not to receive investment from them beyond the time they have already committed to the growth of your company.

Step 3 – Agree an option pool and how options will be distributed – Typically, option pools range between 5 and 20% depending on the type of company, the way the company is financed (e.g. investors may prescribe certain requirements) and the nature of the employees in question. We can help you strategise on how to distribute your share options, taking into account the long-term growth of the business.

Step 4 – Agree commercial details of the scheme – When can employees exercise their options? On an exit or beforehand? If beforehand, will there be a vesting schedule, and if so, over what period? If the employee leaves, can they still exercise their shares? If the employee stays but there is no exit after an expected period, is there a replacement incentive? There are many commercial options for an EMI Scheme which you need to consider before implementing it. We usually help our clients choose the most suitable option based on the long-term goals of their business.

Step 5 –Issue Share Options (within 60 days of HMRC approving the valuation) – This is where each employee signs their individual share option agreement, setting out all the conditions and commercial details of the scheme, and of course the number of share options they are being granted.

Step 6 – Registrations – The share options then need to be registered with HMRC within 92 days of issue, and the company should also register for ERS (employment related securities) through HMRC.

Accelerate Law is a consulting business which was specifically created to provide legal support for startups. We help a number of startups throughout or at various points through the EMI scheme process. Contact us if you think we can help your business.

This article was written by Simon Davies, founder of Accelerate Law. Accelerate Law is a consultancy business providing in-house legal support to startups.

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