What is an EMI scheme and why is it preferred?

At the turn of the millennium whilst the majority of the UK was watching Big Brother for the first time, playing snake on their Nokia 3310 and trying to forget about the Euro 2000s, Tony Blair and the Labour government implemented a Scheme which would change the way start ups in the UK give Employees’ equity. The introduction of Enterprise Management Incentive (EMI) Schemes provided a framework which has made giving equity to employees standardised, simple and tax efficient. Sounds almost too good to be true right?

Since you are still reading I guess you are curious and want to know more about an EMI Scheme, why it was created and why it is preferred? We have more information on EMI that you can find here.

EMI Schemes were created to simplify and standardise the process around employee equity. In early stage start-ups giving away equity by granting employees options is the most effective way to align the interests of shareholders, founders and employees. All parties are working towards a common goal of building and growing a business to be the next carbon capturing company or alcohol free aperitivo. When everyone (especially employees) are incentivised and ultimately rewarded for achieving worldwide domination, employee motivation is improved and sustained and acts as a way to retain top talent. As we have discussed in more detail here,  an early stage start-up often is not able to pay the salaries a big old established corporation can pay. Including equity as part of an employee's package is an enticing incentive to attract top talent. It is becoming more common to hear stories where employees who received equity early can be very rewarded very handsomely. Revolut has recently made over 70 employees millionaires through their employee equity scheme which is a pretty impressive pay-off. Let’s be honest, the only other way of becoming a millionaire we know of is by winning the lottery (or maybe if you invested in Bitcoin in 2010 and still hold it today).

There are only a few criteria your start-up needs to meet to be able to create an EMI Scheme for employees to participant in:

1. The start up must have a permanent establishment in the United Kingdom
2. The start up must have less than 250 employees on the date the Equity Agreement is made
3. The start-up has less than £30 million of gross assets on its balance sheet (think cash, receivables, other physical assets owned)
4. No more than £3 million worth of EMI options are granted at any one time
5. An individual employee is not granted more than £250,000 of EMI options
6. The employee does not hold a material interest when the Equity Agreement is granted (control or ownership of 30% or more of the shares)
7. Employees which are given an Equity Agreement must work for the start up for at least 25 hours per week or 75% of their working time
8. The start up is independent of other companies (i.e. not a 51% or more subsidiary of another company)
9. The start-up is not a joint venture
10. The start-up does not deal in land, commodities, futures, financial instruments, banking, insurance, money lending, property development, provide legal or accounting services, farming, holding, managing or occupying woodlands / forestry, operate or manage hotels, operate or manage nursing homes, ship building, coal or steel production
    

There are also HMRC requirements which each EMI Scheme needs to comply with. By choosing Pomelo to create and manage your employee equity we take care of this requirement, meaning you have more time to focus on capturing carbon or taste testing what goes best with elderflower.

When you mention the words “Equity Agreement” to any founder, they typically want to run a mile as they associate anything legal as complicated and confusing. EMI Schemes are (relatively) simple and standardised, meaning that they are a lot more straightforward to prepare and understand, ultimately meaning less time and money for founders and employees receive an Equity Agreement which is easier to understand.

In mainland Europe every country has a different scheme (with some countries having multiple schemes). This creates complexity and frustration with founders and employees which ultimately results in delayed Equity Agreements and demotivated employees. The ease of EMI Schemes is one reason why we believe the UK is consistently ranked as the top start up hub in Europe.

EMI Schemes are the most tax effective for employees. When options are granted there is no income tax liability. When an employee exercises their options and receives shares, there is no income tax liability (provided the exercise price was at least equal to the market value when the options were issued). On sale of the shares an employee may be liable for capital gains, however this is 10% vs the standard 20%.

20 years on, no one is talking about Big Brother and snake anymore. The English team made a fantastic comeback in the Euro 2020, however even this has slipped most people’s minds.

EMI Schemes may not be the talk of the town but they have stood the test of time and we believe they will still be around for another 20 years.