EMI Share Options

ESO’S - not another acronym

“Employee Stock Options” or ESO are literally, the option, or right, to shares. These are offered by a company to their employees and becomes an option to purchase those shares at a fixed rate in the future (more on this later).

The two main reasons companies give away options opposed to straight shares with Equity agreements are:

• It means the employee doesn’t have to pay for the shares, nor pay tax now; as they don’t actually own the shares yet.
• It helps protect the equity pool of the company, stopping employees taking equity and leaving straight away.
  

The period between giving a share options package and the moment in time when they can “exercise” or “strike” the option is called a “vesting period”. Vesting periods can be event-based, time-based or target-based, and typically come in predetermined increments over the period covered in the agreement.

This makes ESO’s an equity compensation incentive, and a key motivator for start-ups to attract great talent and retain them. The biggest benefit of this method is that the time between when an option is granted and when an option is exercised, the employee's shares should have grown in value alongside the company, yet the employee only has to pay the price set at the beginning. So basically this is like getting a killer discount on something potentially extremely valuable.

More on the EMI Scheme

As we touched on earlier, the EMI scheme is a UK initiative that is backed by the HMRC, we have plenty of information on EMI and its requirements on this landing page.

The EMI scheme is intended to support smaller businesses (i.e start-up’s) attract the best talent to allow them to grow at the rate they deserve, when they aren’t always able to offer the most competitive salaries on the market.

However the key difference between EMI and other schemes is that HMRC approves and validates a certain exercise price - which is why it can maintain fixed and compliant throughout the vesting period. We have more information on EMI compliance in this article here.

In order to gain this compliance status, you need to submit your company's valuation (form here, but the team at Pomelo can also help you do this).

The key to getting this part right is to actually keep your validation low - because this means the cost for your employees later will also stay low, and the benefit will likely be even larger. These considerations mean that it is typically best to set these things up early, or even before your first finance round.

So, how do Share Options under the EMI Scheme benefit employees?

As we mentioned earlier, options do not require any tax considerations, and because they also don’t require any upfront payment for the employees, it makes it a lot easier for them to have an equity package in the business.

When other options or equity schemes are used, they result in the employees needing to pay Income Tax and National insurance on the market value difference and what the employee paid - the discount is no longer seen as a right but instead a bonus and is therefore taxed like one.

When an employee exercises their shares, they are subject to pay Capital Gains Tax, but if your employees have EMI options, they can submit for a Entrepreneurs Relief - which reduces the tax rate to 10% (opposed to the regular rate which can go up to 40% depending on how much of the business you own and what our income or capital tax you have)

How can founders benefit from Share Options under EMI?

There are plenty of benefits for founders when it comes to offering EMI schemes, the main ones are listed below:

Attract the right people

We touched on this earlier, but the main goal of equity packages and share options offerings is to attract top talent. Giving away equity is a pretty well expected process in the start-up world and if you’re not doing it - then you’re likely going to miss out on the best people in the industry. You can read more about this in our article here.

Retain the best people

The second phase of the above is if you’ve attracted the right people, that's great! But you’ve also got to make sure you keep them (and under their own free will…). Share Options schemes can be one of the best ways to keep top talent motivated, as they can see and engage (another big plus of working with us is our platform to help with this) with the business on a whole other level (thanks to the fact you’ve given them a slice of your business pizza!). If you want more information on retaining top talent, you can read a more in depth article here.

Align your employees with your mission

This point is vastly underrated - but giving your employees an options plan or equity means they too are on this wild ride with you. If the company succeeds, they too succeed, which is one hell of an incentive to have. Having them align with the business means they and you are all working collectively towards a common goal - which is also epic for morale.

Reward your employees

Your employees work bloody hard, especially start-up employees as they tend to take on more responsibilities than they signed up for and are also taking exponentially more risk. Why wouldn’t you want to reward them? And with more than a Friday pizza and beer party … (not that anything is wrong with that, but let's get real, equity is a much better reward).

Receive a tax deduction

We don’t always like to talk about money, but let's face it - it is an important aspect of business. And with a Share Options offering under EMI founders will receive a corporation tax dedication - equal to the difference between the market value of shares and the exercise price for employees. This makes it a little extra icing on the cake for you when it comes to tax-man time.

What you’ll need to set up your Share Options EMI Scheme (aside from us 😉)

So now that we’ve convinced you that EMI is great, you’re probably wondering what do I do now? Well the easiest (and best, in our very humble opinion) is to get in touch with us, and let us handle all the hard parts for you. We know the drill, we can handle pretty much most of it for you, as well as guide you on making the best decisions for your employees and your business. OR you can go through this checklist below, flying solo and give it a jam yourself, knowing that you can always give us a bell with us down the line to finish it off, help educate your team or sign up to our platform to keep your team engaged with their milestones.

Step 1 - Establish your option scheme criteria

An EMI scheme is essentially a legal document, which means it needs plenty of clauses and considerations around the details. This includes things like highlighting what the vesting schedule is, what happens in an exit event, what happens when employees leave etc. As part of our services, we have a creation workshop with you where we go through all these main points outlined with industry best practices armed and ready - so we can tailor the agreement to the specific criteria that suits your business.

Step 2 - Create your valuation

Creating your valuation is needed to make sure the exercise price  you’re indicating is both a fair representation of your business, but also lends itself to the EMI criteria. As we mentioned earlier, it’s best if your valuation can be on the low side for your employees, so the earlier you do this the better!

Step 3 - File your valuation

Once you have the top two items, you need to notify and file them with HMRC to reach compliance status. We can’t do the actual filing for you, as it needs to come from a business owner, but we can get all your documents ready and check that your items tick all the boxes for HMRC to certify.

Step 4 - Give the share options to your employees

Once you’ve been approved by HMRC, you can send out the EMI Share Options Agreements to your employees (and this is the fun part!) Here is where they can run through all the workshops with us to get them even more excited about the fact they’ve just been given a part of the business they work in! This is the key moment to make sure they truly understand what's happening, and what they can expect from now into the future.

Step 5 - Update HMRC

Once your employees have accepted and signed their own option agreements, you need to let HMRC know about it. We can help you with this step too, making sure the documents you upload to HMRC are the right ones, with the right information included. This stage needs to be done in 92 days to avoid any late fees and ensure that your scheme is compliant (this is the biggest reason schemes become non-compliant) - but we will give you a nudge to make sure that doesn’t happen.

Step 6 - EMI Annual returns

When it comes to HMRC, we can’t expect a one and done process can we… Every year you’ll need to make sure you complete an annual return. This is pretty simple to do, and again we can help you get this ready and send reminders out. Keeping this up to date is key to maintaining your compliance status, but rest assured - it’s not as daunting as it sounds.

Step 7 - Work towards your goal collectively

Now you can focus on your mission, with your team focusing with you. Pomelo also helps employees stay engaged with the Pomelo+ platform, meaning they too can keep tabs on their vesting dates, watching their available options grow alongside the growth of the business. We also have a section dedicated to founders, so you too can see how each employee is tracking along, as well as the overall Equity pool.