![](\"https:\/\/uploads-ssl.webflow.com\/5a4d09f22b69220001d89be6\/5b4755dfc3102c51a8f11fa5_UK%20EMI%20Options%20Plan.jpg\")
<\/div>The result? Well, according to Index Ventures research<\/a>, Silicon Valley tech workers receive double the \u2018reward for risk\u2019 of their European counterparts – where 20% equity is the median sized pool.<\/p>\n UK employees are simply not aligned to the same extent and this lack of motivation for risk could be a crucial factor in explaining the difference in the number of \u2018unicorns\u2019 (privately owned startups with a valuation of over $1bn) between the two markets.<\/p>\n Differences can\u2019t just be explained away by access to capital and talent, as especially in London both of these factors are in good supply.<\/p>\n Culture plays a big part, where UK employees expect their primary remuneration to be in cash, with stock options being a nice bonus. They\u2019ll likely trade off a lower salary compared to a corporate job for the lifestyle and freedom to innovate, but it will take a lot more stories of UK employees cashing out for a lot of money on big exits before their appetite for risk changes.<\/p>\n In fact, it\u2019s a bit of a chicken and egg situation. Employees don\u2019t want their primary compensation without seeing the success that comes with massive exits, but those massive exits are much less likely to happen without employee alignment.<\/p>\n At SeedLegals we’ve just made it that much easier than ever for\u00a0startups to set up and manage their employee share option pool. Our new EMI Share Scheme product lets founders set one up from scratch in minutes, and track vesting and ownership easily over time.<\/p>\n We\u2019re playing our part in aligning employees and startups, so we can build the next generation of unicorns in the UK (and beyond!).<\/p>\n Click here<\/a> chat to a member of the SeedLegals team about putting an options pool in place.<\/p>\n","protected":false},"excerpt":{"rendered":" In the UK, 10% is the median amount of equity assigned to EMI share option pools. According to Index Ventures in the US, it’s double that.<\/p>\n","protected":false},"author":3,"featured_media":433531,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[100],"tags":[],"event_tags":[],"class_list":["post-18259","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-share-option-schemes-ie"],"acf":{"sidebar_layout":{"related_posts_heading":"You may also be interested in","related_posts":[{"post":{"ID":18232,"post_author":"11","post_date":"2019-09-06 11:05:42","post_date_gmt":"2019-09-06 10:05:42","post_content":"Your comprehensive guide to EMI share options<\/h3>\r\nIn brief:<\/strong> EMI stands for Enterprise Management Incentive<\/strong>. This is a share option scheme backed by HMRC in the UK, designed for employees or directors working for more than 25 hours per week (75% of their time) in a business. Options are generally more beneficial than shares because no tax is paid when they\u2019re granted \u2013 only when they\u2019re exercised. EMI goes further by offering various appealing tax reliefs on exercised options for both the company and its employees.\r\n\r\nIn a nutshell, EMI is the most tax-efficient method of granting options to employees.<\/strong>\r\n\r\nThis guide will explain everything you need to know about starting an EMI share scheme, including:\r\n
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<\/a>Key Background Terminology<\/h3>\r\nIf you\u2019re unsure about the terminology that surrounds shares and options, this short chapter will translate some of the common investment jargon. If you can already decipher this lingo, please do jump straight to our information about EMI share options<\/a>. But here\u2019s what you need to know first:\r\n
Share:<\/h2>\r\nA share is a unit of ownership<\/strong> in a company or a financial asset. In most circumstances, the terms \u201cstocks\u201d and \u201cshares\u201d may be used interchangeably \u2013 though you may refer to your \u201cstocks\u201d as an asset whereby a \u201cshare\u201d is when you\u2019re referencing your ownership of a particular business.\r\n\r\nThere are two main types of share \u2013 Ordinary Shares<\/strong> and Preferred Shares<\/strong>. Ordinary Shares are usually those that a company starts out with at incorporation, whereas Preferred Shares are often given to investors when a company raises money, to give them extra protection on the money that they have invested. A common example of this protection would be granting investors Liquidation Preference<\/strong>, which allows them to be first in the queue to be paid if the company goes bankrupt.\r\n\r\nRemember: in the context of this guide to EMI Share Options, we\u2019re looking at how shares in a business can be owned by its employees<\/strong><\/em> \u2013 not the wider public market. Indeed, the world of stocks and shares goes far deeper than the brief explanation above, but this should give a useful baseline understanding.\r\n
Option \/ Employee Stock Option (ESO):<\/h2>\r\nAn Employee Stock Option (ESO)<\/strong> is offered by a business to its employees, and is the option<\/em><\/strong> to purchase a share at a fixed price<\/strong> (aka \u201cstrike price\u201d) in the future.\r\n\r\nThe period between when you grant share options and when they can be exercised is called the \u201cvesting period\u201d \u2013 this can be time-based, target-based, or event-based \u2013 and can also be incremental (e.g. 25 shares after a year, and 25 more after 18 months).\r\n\r\nIn a nutshell, an ESO is an equity-based compensation incentive. It doesn\u2019t attract tax when granted, and if the company grows and increases in value between when an option is granted and when it is exercised, the employee\u2019s shares will simultaneously be worth more than they pay for them.\r\n
Share Option Scheme:<\/h2>\r\nAs you might imagine, a Share Option Scheme<\/strong> is created to grant options to staff. The main benefit of creating a scheme is to attract and retain the best talent, and to encourage long-term loyalty at an early-stage business. There are two main types of scheme: an Enterprise Management Incentive (EMI)<\/strong> and an Unapproved Option Scheme<\/strong>. These will be explained in detail later in this guide.\r\n
Option Pool:<\/h2>\r\nThe Option Pool<\/a> is the percentage of a company which is reserved for ownership by its employees. This is also called an \u201cESOP\u201d \u2013 Employee Stock Option Pool<\/strong>. The percentage depends on the business, but in the UK the median amount of equity in the Option Pool is 10%. In the US, it\u2019s closer to 20%. VC investors will usually expect a growing Option Pool to devalue the founders\u2019 share of the business \u2013 not their own.\r\n
Unapproved & Approved Share Option Schemes:<\/h2>\r\nUnapproved share options are important to understand in the context of EMI. An unapproved<\/strong> scheme is a share option scheme (as is EMI), but it requires no official involvement or pre-approval from HMRC. The company is free to structure the options scheme as they desire, but there are no associated tax benefits \u2013 aside from not being charged National Insurance or Income Tax when they\u2019re granted.\r\n\r\nAn approved<\/strong> scheme is less flexible, because you must meet certain HMRC conditions to qualify. But approved schemes have significant advantages over unapproved schemes<\/strong>. We\u2019ll explain these advantages later in this guide, focusing our attention on one type of approved scheme: the Enterprise Management Incentive (EMI)<\/strong>. Other approved schemes include Company Share Option Plans (CSOP), Share Incentive Plan (SIP), and Save As You Earn (SAYE).\r\n
<\/a>In Detail: What is an EMI Share Options Scheme?<\/h3>\r\nAs we outlined in the introduction, an EMI Share Options Scheme<\/strong> is an initiative by HMRC that allows UK businesses to give share options to their employees with significant tax benefits<\/strong>.\r\n\r\nThis scheme is intended to help smaller independent businesses realise their potential by attracting and retaining the best employees for long-term success. In practice, the key difference between EMI and unapproved schemes is that HMRC will approve a valuation and fix a certain strike price<\/strong>. And of course, there are other conditions for businesses and employees to meet, which we outline later in this guide<\/a>.\r\n\r\nThe EMI valuation is something that you propose to HMRC via the VAL231 Form<\/a>. You\u2019ll need to calculate two key numbers for this proposal: the Unrestricted Market Value<\/strong> (what the shares are actually worth), and the Actual Market Value<\/strong> (what the shares are worth, discounted for restrictions, e.g. the fact that the shares are vesting over time). Remember, you\u2019ll want a low valuation<\/a>, because the profit will then be greater for your employees when the value of the shares increase over time.\r\n\r\nImportant note:<\/strong> The SeedLegals automated valuation report tool will help your startup create a full valuation report, which adheres to HMRC\u2019s rules and helps your EMI scheme be approved in a fraction of the time and cost of using a law firm or an accountant. Sign up here.<\/a><\/em>\r\n
<\/a>The Benefits of an EMI Share Options Scheme<\/h3>\r\n
What are the benefits of Share Options for employees?<\/h3>\r\nFor employees, options don\u2019t attract tax until they\u2019re exercised. This lack of upfront payment generally makes them an appealing way to secure equity in the business they work for.\r\n\r\nWhen unapproved<\/em> options are exercised, they attract Income Tax and National Insurance (NIC) on the difference between the market value and the amount the employee pays \u2013 in essence the discount is seen just like a salary bonus. EMI options are more beneficial<\/strong> \u2013 with no Income Tax or National Insurance due on the difference between the HMRC-approved valuation (actual market value) and the value of the share when exercised.\r\n\r\nAfter obtaining shares, the holder is subject to Capital Gains Tax (CGT) on their disposal, but EMI option holders can claim Entrepreneurs\u2019 Relief<\/a> \u2013 reducing the rate to just 10%. In contrast, unapproved option holders will have to pay regular Capital Gains Tax unless they own more than 5% of the company.\r\n
What are the benefits of Share Options for business?<\/h3>\r\nThe benefits of an EMI Share Options Scheme are wide-ranging for your business. Financially, you\u2019ll enjoy a Corporation Tax (CT) deduction equal to the difference between the market value of the shares at exercise and what your employee pays for them. When the exercise price is equal to the value, your CT deduction equates to what would have been taxed without the EMI Scheme relief. If you\u2019ve granted options at a discount, you\u2019ll get CT relief for the discount and what would have been taxed without EMI.\r\n\r\nBut the benefits for your business go deeper than Corporation Tax relief. Here are more key advantages:\r\n\r\nAttract talent:<\/strong> Offering a rewarding option scheme will attract the best talent in the jobs market, which is especially important for startups and early-stage businesses battling to grow in competitive industries. Indeed, options are fast becoming a must-have and expected \u201cperk\u201d in the tech startup world.\r\n\r\nRetain talent:<\/strong> Depending on the conditions of your options scheme, it keeps your employees focused on medium-to-long-term growth and sustainable success. The options must be exercisable within 10 years, and most businesses allow exercise far sooner (e.g. 2-3 years).\r\n\r\nThis creates a magic combination of ownership and foreseeable payoff \u2013 a powerful motivator for staff to work through challenging periods and keep faith in the potential of the business. In most cases, options are lost if the employee leaves, so the EMI Share Option Scheme helps you nurture your highest performers for senior management roles.\r\n\r\nAlign interests:<\/strong> If the company succeeds, the employees with EMI options will enjoy a significant financial reward. Staff can see the value of their shares increase as the business grows, which is a tangible signifier of progress. The whole team can then be aligned to generating a profitable exit. This also helps staff feel valued, trusted, and involved in building a strong company.\r\n\r\nReward employees:<\/strong> EMI options can be offered as a reward for meeting certain individual or company targets. This provides an incentive for staff to go the extra mile, and it can provide a performance-based reward which doesn\u2019t impact cash reserves and at the same time creates tax benefits for all involved.\r\n
<\/a>EMI vs. Unapproved Options Schemes: Comparison Examples<\/h3>\r\n
Unapproved Options:<\/h2>\r\nA company offers their employee, Jane, an option to secure 5% equity for a market value of \u00a310,000. Later, she exercises this option when her shares are worth \u00a3100,000. As with any options scheme, there was no tax to pay when the options were granted, but when they were exercised they were seen by HMRC as taxable earnings \u2013 meaning Jane was responsible to pay tax on the \u00a390,000 difference.\r\n\r\nThis would be higher-rate Income Tax (40%), meaning a \u00a336,000 tax bill despite not having seen any of the cash. When the company is sold 18 months later, Jane sells her shares for \u00a3125,000. This is a \u00a325,000 increase in value from when she acquired the shares, and 20% Capital Gains Tax will be due on this \u2013 meaning an extra \u00a35,000 bill.\r\n\r\nIn total, despite acquiring shares for \u00a310,000 and selling them for \u00a3125,000, Jane has paid \u00a341,000 in tax. What\u2019s more, \u00a336,000 of this is due before she actually has her hands on the cash \u2013 which leaves her very vulnerable in the case of a sudden collapse in share value.\r\n
EMI Options Scheme:<\/h2>\r\nSarah is offered the same equity for the same value within a different EMI-qualified business, and she also acquires her shares worth \u00a310,000. However, exercising her options incurs no tax bills whatsoever, and when she later sells her shares for \u00a3125,000 she is entitled to Entrepreneurs\u2019 Relief; the reduced rate of 10% on Capital Gains Tax. This means that Sarah will now pay CGT on the \u00a3115,000 value increase between what she paid for the shares and what she sold them for: 10% = \u00a311,500.\r\n\r\nSo, Sarah will pay \u00a311,500 total tax (when she has the cash), while Jane pays \u00a341,000. The EMI Share Options Scheme would therefore save more than 112% for the employee in this circumstance. This shows why EMI is so popular, and why it is a must-do for growing startups and small businesses.\r\n\r\nImportant note: As we mentioned earlier, Sarah would also benefit from a HMRC valuation which is as low as possible. This allows her to get the options at a lower strike price, thus maximising her profit when the company shares are eventually sold.\r\n
Read our companion<\/span>\u00a0article: EMI or unapproved share option scheme; which one is best for you?<\/a><\/blockquote>\r\n \r\n
<\/a>Conditions for EMI Qualification:<\/h3>\r\n
Business:<\/h2>\r\n
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To learn more about whether your company qualifies for an EMI Share Option Scheme, check out our article: Does your company qualify for an EMI Share Option Scheme?<\/a><\/blockquote>\r\n
Employee:<\/h2>\r\n
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Options:<\/h2>\r\n
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<\/a>How to Set Up an EMI Options Scheme<\/h3>\r\nTraditionally, setting up an EMI Option Scheme was expensive: it could cost up to \u00a35000 - \u00a310,000. You\u2019d need to hire a law firm to draft the scheme rules and bring an accountant in to draft a valuation for submission to HMRC. And for schemes with more than 50 employees, you\u2019d be looking at \u00a310,000 - \u00a320,000. This could take months and you\u2019d be on your own when managing the scheme with HMRC.\r\n\r\nSeedLegals has changed all this.<\/strong> Using our platform, you can create a completely personalised EMI Scheme, set vesting conditions, have law firm quality (or better!) legal drafts, a market-leading valuation, and get help with all the ongoing management of the scheme. This comes at a fraction of the cost of any other solution: a \u00a31,500 flat fee for scheme setup,<\/strong> and a \u00a31,000 flat fee for your EMI valuation<\/strong>.\r\n
Book to speak to an expert to start your scheme.<\/h2>\r\n\r\n