When is the right time to put an EMI Scheme in place?

How well developed does a startup need to be to consider an EMI scheme?

Most founders understand the power of offering options to prospective employees when recruiting and retaining talent. It’s a great tool to align key employees with founders and investors on a long-term perspective for your startup, making sure everyone has an incentive upon exit.

We often get asked when is the perfect time to put your EMI Scheme in place. The right time will be different depending on the revenue of your company, the number of current full-time employees and fundraising and hiring plans for the near future.

Essentially, the right time is as soon as your company has either:

• Gained traction
• Raised funds, or
• Started scaling its team.

With more and more startups now offering options to key employees, those joining the team will probably want and expect options on top of an annual salary in order to benefit from long-term value creation.

Are you looking to put an option scheme in place? You can sign in to SeedLegals to start the process or book some time in with an expert here.

Why do I want a low strike or exercise price?

When putting an EMI Scheme in place, HMRC will agree the Strike Price based on:

• The price per share of the company’s previous funding round, or
• The company’s financial status if there has not been a previous funding round involving the same share class as the option shares

The lower the Strike Price, the easier it is for employees to exercise their share options and turn them into shares. This is because there will then be less income tax on the receipt of those shares, and employees will also enjoy the full benefits of an upside upon an exit event.

At SeedLegals, we’ve created a sophisticated valuation methodology that creates an EMI Valuation Report based on your company’s financials, last price per share paid, and factoring in additional discounts for the share class restrictions on the options shares. Using the appropriate weighting of these factors for the unique situation of your company, our report aims to achieve the best possible EMI valuation discount, giving your employees the maximum benefit when they exercise their options later.

Is setting up an EMI option scheme ahead of a round advantageous?

As said above, a lower Strike Price is more beneficial, and so the objective of the company is to aim to agree with HMRC as low a valuation as possible. Obviously, before a funding round (be that your first or second round), your reference valuation will likely be significantly lower than what the post-money valuation will be after you close your round.

Because of this, it would be beneficial to grant options and put the EMI Option Scheme in place well ahead of a funding round to benefit from the reduced valuation.

Also, by creating your EMI Scheme and completing your EMI Valuation early on, before the company has raised funds or generated significant revenues, you can achieve a considerably higher discount. You’ll then be able to grant equity to your employees at that discounted price for the next 120 days after the EMI valuation up to 1 December 2022. Any EMI valuation agreement letters issued by HMRC on or after that date will be valid for 90 days only.

Should I set up an EMI scheme after a round?

If you don’t have employees before your funding round and you’re only planning to hire people after getting funded, then you may as well wait until after your first round.

But here is the catch, If you wait too long after your funding, your valuation will go up as you use the new in-coming funds to continue building traction. And so it will be harder to argue for a lower valuation with HMRC.

Naturally, we see a surge in employees being hired after a funding round. So when you have just closed your round, it’s probably the right time to set up an EMI Scheme before recruiting. In fact, our data shows that the average time between a round closing and an EMI Scheme being put in place is just 1 month and 21 days.

How can I get started?

This was previously a long process but on SeedLegals you can get your option scheme set up and your HMRC valuation reviewed by a member of our team in as little as one day.

Our team are on hand to answer any questions, start a chat with one of our options experts or book an option scheme design call.