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When is the best time to create your EMI option scheme and do your EMI valuation? So SeedLegals is hugely popular for companies to do their option schemes. And so we have lots of founders calling us looking to create their option scheme.
And some are looking to do it after they’ve raised investment and some before they’ve raised investment. So the question is, when’s the best time? Should you do it now or should you do it later? You don’t have any money now. You will have money after your funding round – should you wait? So in the next few minutes, I’ll help you find the right time to do your option scheme and valuation.
So when you create an option scheme, you’re gonna write to HMRC, which you’ll do on SeedLegals, to get an EMI valuation. And you’ll argue for the purpose of the EMI options that they’ve got the lowest possible valuation. That way, your employees, when they exercise the options, have the maximum upside.
So if you’ve just created your startup, you’ve incorporated on Companies House a few weeks ago, obviously your valuation is zero. But once you’ve done a funding round at, let’s say, a 3 million valuation, your last valuation from investors was obviously 3 million.
So you can argue with HMRC that the share option class is less valuable and they don’t have voting rights and other things to aim to get a lower valuation. But in short, once you’ve raised investment, your valuation for your EMI purposes is gonna be much higher than it was beforehand.
So what you really want to do is ideally do your EMI valuation and set up your option scheme before you do a funding round so your employees get the most upside.
So why wouldn’t you just do that right now? Well, there are a few things to consider.
So the first one is when you get an EMI valuation, HMRC takes four to eight weeks to do that. So there’s some uncertainty when you’ll get it. And once you’ve got it, that valuation is valid for 90 days, actually the earlier of 90 days and you issuing new shares in the company.
So imagine you’ve got this window: you want to do your valuation today, you’re gonna get it in four to eight weeks, hopefully at zero valuation. Fantastic. But now, what if you don’t hire any employees for three months? Well, that’s a wasted valuation. And what if you do a funding round, like moments after the valuation arrives or even beforehand? Well, that’s also a wasted valuation.
So if your valuation is now not valid anymore because it’s run out or because you’ve raised investment or issued shares or you’re about to raise investment – not a huge drama. If you’re on the SeedLegals option subscription, you can do unlimited valuations for free. It’s more work for us, no more cost for you. But nonetheless, it’s a bit more effort to do it again.
So to wrap up, here’s my advice, which is ideally do your option scheme and valuation before your funding round in order to lock in the lowest possible EMI valuation and the maximum upside for your employees.
But if any of the following are true, wait till later.
One, you don’t have employees. Obviously, there’s no point creating an option scheme to benefit employees if you don’t have employees or if you won’t have employees in the next three months or so because that’s the time that the valuation is valid. If you’re not gonna have employees, just wait till later.
Number two is if you’re about to do a funding round in the next few weeks, it’s probably gonna clash. And so it’s probably not gonna be worth it to get the EMI valuation upfront because you know, with a high degree of likelihood, it’ll have expired and you’ll have to do it again.
This then leads to the quandary: you’re not quite sure when your funding round should be. And here we’ve seen founders sometimes going, “Should I delay my funding round because I’ve applied for an EMI valuation, and delaying it will help me get the valuation and issue options?”
It’s a complicated question, but I would think your number one goal is to get investment. You really don’t want to go to investors and go, “Thanks for your money. Can I not take your money for a few months more while I work out my option thing?”
So I think if you’re in that period where you’ve decided it’s worth it to apply for an EMI valuation beforehand, and actually your fundraising goes pretty quickly – awesome. In the worst case, just forget your valuation; you can do it again, it’s not gonna cost you any more on SeedLegals, and now you haven’t delayed your funding round. Of course, the side effect is the EMI valuation you get won’t be as good as before.
You could also wait several months later when you’ve used some of the money, and then you may be able to persuade HMRC that actually your last round valuation isn’t valid anymore. It’s now based on P&L, run rate, burn rate, and other things.
Now if you decide to wait till later, good news – you can still promise your employees options immediately at zero cost to you. So get on SeedLegals, and when you create an employment agreement, in the employment agreement, you can say, “I promise to give you share options pursuant to an option scheme I create later.”
So if you don’t have any money upfront and you want to promise employees options and you’re not ready to buy an option scheme – much as I’d love to sell you an option scheme on SeedLegals – actually, you can just use our employment agreement to promise options to your team members. That won’t be an option grant. That’ll be enough to keep them happy at the time you hire them. And the employment agreement will say, “If and when we do an option grant or option scheme, we will grant you this number of options then.” And you now have the time in order to do your round, get investment, wait for the right time to do your EMI valuation, and then grant options to your team members.
And in any event, since it’s an effort to do an EMI valuation, you’re probably gonna do it twice a year maybe. So everyone you hire in the meantime, you’re gonna in their employment agreement promise them options. And then every January, or maybe every June and January or something like that, you’ll do a new EMI valuation if you’ve got new employees or new people to grant options to, to grant their options at that point.
So I hope that is the 101 on the perfect time to set up your option scheme and apply for your EMI valuation. And if you need more, hit us up on the SeedLegals chat site, and we can help. Thank you.
