UK employees moving to the US: How to manage their share options

So, you’ve granted your employees share options in your UK company. But now things are changing. Maybe your business is expanding into the US, and you’re sending a key employee overseas. Or perhaps someone in your team’s chosen to relocate for personal reasons.

Either way, it’s tough to know how to deal with the situation when your employee has options in your UK company. And for most UK startups, those options are likely to be EMI options – the most common and tax-friendly way to reward employees.

What are EMI options?

Options are great for attracting talent and aligning employees’ interests with the company’s growth. As the company’s value increases, so do the options.

Most UK startups issue EMI options (which stands for Enterprise Management Incentives). They’re a type of employee share option scheme for UK companies.

But why is EMI so popular? It’s the tax advantages. If the options are granted at market value, employees won’t pay income tax or National Insurance when they exercise. Instead, they pay capital gains tax when they sell the shares. Plus, the company gets a corporation tax deduction for the difference between the market value at exercise and the price the employee pays.

So, EMI options help reward employees, letting them benefit from the company’s success in a tax-efficient way.

But the tax benefits of EMI options only apply to UK taxpayers, so moving to the US puts these benefits at risk.

What happens to EMI options when an employee moves to the US?

When a UK employee with EMI options moves to the US, there are a few issues that arise:

• Person will become a US taxpayer: The tax benefit of EMI options only applies to UK taxpayers. Once the employee ceases to be a UK taxpayer, they’ll lose the EMI tax benefits. During this change, there could be a period between the EMI options lapsing (90 days after they cease to be a UK employee) and them becoming a US taxpayer. So, they’d have to consider any US tax liabilities that arise in this period.
• US tax exposure: Even though UK EMI options aren’t taxed on grant or vesting, once the employee is in the US, they could fall under US tax rules when exercising their options. This means potential US income tax, so it’s worth the employee getting US tax advice on their situation.
• Pricing risks: If the exercise (strike) price of the EMI options is lower than the fair market value of the shares at the time of the grant, they may be treated as “discounted options” under US tax rules. This can lead to immediate income tax, a 20% penalty, and interest charges – even if the options aren’t exercised.

So, you’ll need to come up with an arrangement to replace that person’s EMI options with new share options that comply with US 409A regulations. Let’s discuss how.

What to do when a UK employee with EMI options moves to the US

By moving to the US, your EMI-holding employee would likely lose their UK tax residency. This would mean they lose the main benefit of their share options: the tax advantages.

So, if a UK employee with EMI options moves to the US, there are a few approaches you can take to keep their incentives effective and compliant with US rules.

Option 1: Exercise the EMI options before the move

The employee could exercise their options before they move.

But this option won’t usually be available (most option schemes only allow exercise when the company is sold or going public).

If they are able to do this, the benefit is that they’d lock in the EMI benefits since they’re getting the shares while they’re still a UK taxpayer.

But it’s not usually a good idea. By doing this the employee would become a shareholder in the company, getting shareholder rights (like voting or dividend rights). This probably isn’t what you want in your company.

Also, the employee would have to pay money to exercise the option right now without knowing whether the shares will have any value down the line.

So, while this is an option, it’s not the preferred one in most cases.

Option 2: Keep the existing option grant

The employee could keep their existing options after moving to the US, but that comes with its own issues.

With this strategy, the options would no longer qualify as EMI once the employee moves, as they’d eventually stop being a UK taxpayer. That means the options would be treated as unapproved options (losing their UK tax benefits).

If you want to go down this route, you could get a 409A valuation to determine the fair market value of the UK company’s shares. But most companies don’t usually get a 409A valuation after the grant date – they rely on the original FMV determination from the board (which might be based on the valuation agreed with HMRC). Just note that if the 409A valuation comes out higher than the original exercise price, that could result in the employee receiving a penalty from the Internal Revenue Service (IRS), plus they’d be taxed on the options as they vest, not when they’re exercised.

By keeping the existing grant, you save yourself having to cancel and reissue the options. But if there’s a gap between the 409A valuation and the exercise price, it could end up being extremely costly for the employee.

Option 3: Replace the existing option grant

The most straightforward option is to cancel the employee’s existing EMI options and issue a replacement grant of unapproved shares under a new US plan.
Here’s how you do this:

1. Cancel the existing EMI grant: This would involve formally terminating the UK EMI options by mutual consent of the company and the employee.

2. Set up a US plan: You should create a US equity incentive plan (this can either be a sub-plan that sits under your existing UK equity scheme or a standalone US plan that sits alongside your UK plan with its own pool of shares). This option plan would be designed to comply with US tax law.

3. Get your US plan approved: Before you grant your share options, the plan needs to be approved by your board of directors and your shareholders (though you can grant options before you’ve got shareholder approval). The approvals should cover key details like the number of shares set aside for issuance under the plan and the types of equity compensation you’ll grant.

4. Get a 409A valuation: A 409A valuation is a must when issuing shares under your US plan. This determines the fair market value of your company’s shares and helps set the exercise price for the US options. Without this, you risk the IRS imposing immediate tax liabilities on you and the employee. We’ll cover this in more depth below.

5. Check state-specific requirements: Before granting options in the US, it’s important to check whether any filings, fees, or notifications are required in the state where each option recipient lives (not necessarily where they’re working). Different US states have different rules, and some may have specific requirements when granting share options. Also, using an exemption like Rule 701 can help you avoid complex registration processes.

When you grant the replacement option, it would need to mirror the original vesting terms (accounting for the time that has passed since its grant).

For example, if Alex had an option with a 4-year vesting schedule and is 2 years in, the replacement grant would reflect that half the options are vested, with the remaining options vesting over the next 2 years.

This approach is best to reduce the risk of penalties arising from the 409A valuation. Plus, once the US plan is in place, it makes it easier to grant options to other employees in the same situation.

One thing to keep in mind is that 409A valuations in the US are typically higher than UK EMI valuations. So, your employee might be unhappy as they now have to pay a higher price to exercise their options (as well as losing the tax benefits associated with EMI options). To solve this, you might decide to offer a larger option grant to compensate them for the difference. By giving them more options, you ensure their overall reward remains competitive despite the higher valuation.

What is a 409A valuation, and why do you need one?

A 409A valuation is an independent assessment of a private company’s share value. It’s named after Section 409A of the Internal Revenue Code.

This valuation sets the fair market value (or FMV) of a company’s shares and the price at which employees can buy the shares – called the exercise (or strike) price. The valuation is needed in order to comply with the IRS. Without it, anyone receiving share options could face serious tax issues. Issues around pricing can also impact your future financings or cause problems on your company’s exit.

If you’ve got an EMI option plan in the UK, you’ll have an HMRC-approved EMI valuation. But you can’t use this for your US options. You’ll need to establish a new FMV by conducting a 409A valuation. Keep in mind that UK EMI valuations typically result in a lower value than US 409A valuations.

A US 409A valuation is valid for up to 12 months, unless your company experiences a material event in the meantime (for example, financing round).

You can read our guide which covers the 409A process, the repercussions of not doing one and how to choose a specialist.

Once you’ve set up a US plan and sorted out 409A valuations, the process becomes repeatable. The next time you hire in the US or expand further, you won’t need to reinvent the wheel, you’ll have a proven framework ready to go.

Expanding to the US?

If you’re eyeing up US investment or need to do a Delaware Flip, SeedLegals can help ensure you’re ready for global expansion. Book a call with our team below.