EMI or Unapproved Share Option Scheme – which is best?

‍Because of the considerable tax advantages, EMI schemes are usually considered to be ‘better’. But the best option scheme for you depends on the circumstances of your company, who you want to grant options to, and how much flexibility you need.

In this post, we explain (briefly!) how EMI and Unapproved option schemes work, what’s similar, what’s different, and how to decide which type of option scheme to set up for your company.

Contents

• EMI and Unapproved option schemes are most relevant for UK startups and SMEs
• What is an EMI scheme?
  What are Enterprise Management Incentives?
• What is an Unapproved option scheme?
• EMI vs Unapproved share option schemes – which is best?
• Comparison of EMI versus Unapproved share option schemes
• What’s the best way to set up an EMI or Unapproved option scheme?
• Talk to the experts

EMI and Unapproved option schemes are most relevant for UK startups and SMES

If you’re reading this you probably know about the advantages of incentivising your team with share options.

All share option schemes are similar in that they allow you to reward your staff by giving them the right to buy shares in your company in the future (the share option) at a pre-agreed price (the strike price or exercise price).

Your team can earn their share options if they work for you long enough (time-based vesting) or if they help you achieve specific business goals (milestone vesting).

When a team member exercises their options at some time in the future, they’ll be able to buy the shares at the strike price. If they sell them later at the market price, they will gain from the difference between the strike price and the market price.

There are two types of option schemes that are most relevant for UK startups:

• Enterprise Management Incentive scheme
  Also known as: EMI scheme
• Unapproved scheme
  ‘Unapproved’ means that the scheme isn’t part of the UK government’s ‘approved’ tax-advantaged share schemes.

There are other types of share and option schemes – such as Company Share Option Plans (CSOP), Share Incentive Plans (SIPs), Save As You Earn (SAYE) and others – but they’re generally not as useful for UK startups because they don’t offer the simplicity of Unapproved schemes or the tax benefits of EMI schemes.

If you hear the term ESOP, that’s usually an American term meaning any Employee Share Option Plan (or Employee Stock Option Plan), so if you hear or read that you should set up an ESOP, for a small UK company that generally means setting up an EMI share option scheme. Easy.

So we’ve determined that there are two types of option schemes relevant for startups. Next we’ll explain how these two schemes work, and how to decide which scheme is right for your company and team. Spoiler: many companies run both an EMI scheme and an Unapproved scheme.

What is an EMI scheme?
What are Enterprise Management Incentive options?

EMI option schemes are popular with UK startups because they offer significant tax advantages which could be worth hundreds or even thousands of pounds to both your company and your option holders.

Of course, such generous tax advantages come with eligibility criteria and ongoing compliance requirements enforced by HMRC. These requirements apply to the:

• company with the EMI scheme
  For example, companies in certain industries don’t qualify for EMI. ‘Excluded activities’ include farming, banking and legal services.
• options holders (employees granted EMI options)
  For example, the employee must be a PAYE employee and spend at least 75% of their working time working for your company.
• shares (if/when the holder exercises their options)
  For example, the shares must be ordinary non-redeemable shares.

Importantly for EMI schemes, people who aren’t Directors of your company or on your PAYE payroll – consultants, advisors, non-executive directors and so on – are excluded. And because EMI schemes come with UK tax advantages, there’s no point granting an EMI option to an employee who isn’t (and isn’t likely to become) a UK taxpayer.

Because there’s a limit to the amount of EMI options each company can allocate, so it’s sensible to grant EMI options only to UK employees – if you grant EMI options to non-UK employees, they count towards the £ 3 million limit but they and your company won’t get any tax benefits.

For everyone not eligible for EMI options – excluded companies, freelancers and consultants, non UK staff etc – you can grant options from a separate scheme. Which is where an Unapproved scheme might be the solution you need.

What is an Unapproved option scheme?

An alternative to EMI option schemes for UK companies is an Unapproved scheme. It’s called ‘Unapproved’ because it’s your own scheme, without all the rules and regulations set by HMRC.

Unlike an EMI scheme, when you set up an Unapproved scheme and issue options, the tax authorities don’t have to sign off anything. ‘Unapproved’ doesn’t mean the scheme is illegal or dodgy – merely that these schemes don’t come with any tax advantages because they aren’t endorsed by HMRC.

The big advantage of Unapproved schemes is that you can grant options to people who don’t qualify for EMI options. This is why many companies set up both an EMI and an Unapproved option scheme – so you can offer share options to any co-workers and collaborators in a way that’s appropriate for their individual circumstances.

EMI vs Unapproved share option schemes – which is best?

To help you decide which scheme is right for you, here are some questions to consider:

• Is your company eligible for an EMI scheme?
• Are your team members eligible to receive EMI options?
• If you already have an EMI scheme, what’s the value of the shares under the options you’ve already granted?
  And do you have a valid EMI valuation?
• What conditions do you want to set for your option holders?

Still not sure? Take a look at the table below to compare EMI and Unapproved schemes side by side:

Comparison of EMI versus Unapproved share option schemes

What’s the best way to set up an EMI or Unapproved option scheme?

On SeedLegals we’ve automated EMI and Unapproved option schemes so you can build and run your scheme yourself.

To get started, you’ll need an annual Share Options Subscription. If you want to check out the workflow first, sign up for a 7-day free trial. After you log in, navigate to Share Options. You can ask our experts for help to choose the right scheme, the vesting schedule and exercise terms for your team. We’re here to guide you through every step. All the documents you need are generated automatically on SeedLegals, including the scheme rules, option grants, tax elections and more.

Talk to the experts

To get answers to your questions or to get started on building a share option scheme (or schemes) for your team, book a free call with our experts.