Data from HMRC shows us that more and more startups are now offering options to key employees as a method to motivate, recruit and retain talent.
So we were thinking at SeedLegals, what can be a great gift for your most talented employees? Well, paying them a bonus is definitely nice, as is offering them a holiday to Australia to escape the weather, but how about this… grant them share options in your startup?
You may think “Why do I need that?”, well this is why we decided to write this article.
But first, does your company qualify for an EMI Share Option Scheme?
The total number of companies that are giving equity to their employees have been gradually rising (and in fact accelerating) since 2009-10. There are currently 13,330 companies running Employee Share Schemes in the UK (a 48% increase in the last decade). Most of the growth has come from EMI schemes – the most tax-efficient way to give equity in small companies.
How does granting options lead to motivation, recruitment and retention?
Thanks to the “Ownership Effect”. Supported by a host of research including the Impact report by the Employee Ownership Association, it shows that when someone owns even a small piece of equity in a business, their relationship with that business changes: they bring more to the table, emotionally, psychologically and demonstrate enhanced commitment – a commitment far beyond what money can achieve. (Pugh, W., Oswald, S. and Jahera Jr., J. (2000). The effect of ESOP adoptions on corporate performance: are there really performance changes?. Managerial and Decision Economics, 21(5), pp.167-180).
But first back to basics – what actually is an EMI option scheme? This is a government‑backed scheme introduced in the Finance Act 2000 and approved by HM Revenue and Customs (HMRC). It allows employers to grant options to employees in a simple, tax-efficient and flexible way. While there are several options plan available, the EMI (Enterprise Management Incentives) share option scheme is by far the most generous mechanism with which to award employees with equity in your company, and the most popular one (with 84% of the companies offering a scheme, only offer EMI).
Instead of a share, where someone owns a part of the business outright – an option is the right to buy a share at a fixed price.
Instead of giving traditional shares to members of the team that could cause a large tax bill which certainly isn’t an ideal gift – you can use options to firstly defer any tax payment until the person receiving the equity is pretty certain they can make some money out of it, as well as reducing the total amount of tax due.
This is what makes EMI schemes so good – as they do not attract any tax when they are granted or exercised (there are caveats, but for the most part), but only when they are sold so normally when there is an exit or an IPO. Moreover, when they are sold the employees will only pay 10% entrepreneurs relief on any profits that they make from the EMI options! It’s the best method to give equity to your co-founders and team.
You might have concerns that:
- Giving equity sounds expensive compared to just giving bonuses
- Option Schemes are going to cost a lot to set up
- It’s going to take a lot of time, admin and paperwork to get set up
It used to cost between £5000 – £10000 to set up an option scheme, (with schemes for more than 50 employees costing upwards of £20000), SeedLegals’ new EMI service lets companies set up an EMI Option Scheme online for £1500 flat fee. Separately, if you want your employees to benefit to capture the maximum upside – you’ll need to agree a low EMI valuation with HMRC – for which we’ve built the world’s first automated valuation tool.
Setting up an EMI Options Scheme used to be a complex and time-consuming process, with months spent creating the paperwork with both lawyers and accountants. Technology and automation has now changed that for good. Now, in just a few clicks, any company can generate the option scheme paperwork and issue equity to their team.
Sign up to SeedLegals to set up your EMI Option Scheme now.
As with all SeedLegals products, our team is on hand to help every step of the way, book a full demo with an EMI expert or just hit the chat button down below.