An EMI Scheme is a tax-advantageous employee share option scheme which enables:
(a) Employers to incentivise loyalty and reward employees without increasing salaries, and
(b) Employees to acquire shares in the company at a pre-agreed low price (the “exercise price”) usually lower than the current market value, and therefore share a piece of the pie and align their personal goals with those of the company.
EMI Schemes can be a powerful tool for attracting high-calibre employees and retaining them in a competitive job market. By offering the potential to become shareholders, startups can demonstrate a commitment to rewarding hard work and loyalty.
Broadly speaking, an EMI scheme entitles employees who exercise options to buy shares to a 10% capital gains tax rate when they sell those shares, where usually it would be around 20%.
Share options don’t need to be offered via the EMI Scheme – this is just one option – but it is the most common and likely best option for startups.
A company and the relevant employees need to qualify for the scheme. Startups often meet the criteria due to their smaller size and growth potential. This makes the EMI scheme accessible for many startups that aim to attract and retain top talent. Our team would usually run a quick assessment to ensure eligibility before implementing. Each employee needs to work for you for at least 25 hours per week or 75% of their working time (if part-time) to be eligible.
We, or your accountants send a short letter to HMRC, stating that you wish to implement an EMI Scheme to enable your employees to acquire options to buy shares at a later date at the current valuation (which, if the company hasn’t turned over any money yet, could be £0.0001 per share, or whatever the shares were worth when you incorporated your company).
Although when looking for investment, you are incentivised to create a high valuation to preserve your equity, when implementing an EMI scheme, you generally want a low valuation to enable your employees to acquire the shares in future for a lower amount. On the one hand, this means less money for the company when employees exercise their options – but ultimately, the purpose of the scheme is to incentivise employees, not to receive investment from them beyond the time they have already committed to the growth of your company.
Typically, the ‘pool’ of shares to grant to employees (the option pool or the ESOP (employee share option pool)) range between 5 and 20% depending on the type of company, the way the company is financed (e.g. investors may prescribe certain requirements) and the nature of the employees in question.
We can help you strategise on how to distribute your share options, taking into account the long-term growth of the business. 10% is most common.
Within the pool you can provide varying levels of share ownership to different employees based on their contributions and roles within the company. For instance, key members of your management team may receive a larger share allocation, reflecting their strategic importance to the company's growth.
When can employees exercise their options? On an exit or beforehand? If beforehand, will there be a vesting schedule, and if so, over what period? If the employee leaves, can they still exercise their shares? If the employee stays but there is no exit after an expected period, is there a replacement incentive?
There are many commercial options for an EMI Scheme which you need to consider before implementing it. We usually help our clients choose the most suitable option based on the long-term goals of their business.
This is where each employee signs their individual share option agreement, setting out all the conditions and commercial details of the scheme, and of course the number of share options they are being granted.
The share options then need to be registered with HMRC within 92 days of issue, and the company should also register for ERS (employment related securities) through HMRC.
Clear communication with team members is essential during the implementation process. Ensure that employees understand the benefits and details of the EMI scheme, including the potential rewards and the conditions under which they can exercise their options. A well-informed team is more likely to be engaged and motivated. Holding informational sessions or one-on-one discussions can be highly effective to achieve this.
Overall, motivating your team with shares through an EMI scheme is a strategic move that can attract, retain, and motivate top talent while preserving your startup's cash flow. With its favourable tax treatment and alignment of interests, the EMI scheme is a valuable tool for startups looking to build a dedicated team.
If you have questions or need assistance with implementing an EMI scheme, contact Accelerate Law to leverage our expertise and legal advice tailored to the startup ecosystem.
Accelerate Law is a legal consulting business created to provide legal support for startups. We help a number of startups throughout or at various points through the EMI scheme process. Contact us at email@example.com if you think we can help your business.
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Silvia Dal Cin
The General Manager
Ex M&A Project Manager
Trained as a lawyer in Italy