The EMI Breakdown

What the heck is an EMI scheme?

An EMI scheme is a form of an ESOP (Employee Share Option Plan) and is the legally binding document that defines and outlines the options (or equity) you want to give to your employees. ESOP is the overarching term for this kind of agreement, and the EMI agreement is one that is specific for the United Kingdom. All EMI schemes will be signed by the founder and the Employee receiving the options or equity - and is the guarantee of the agreement for all parties. The important thing to keep in mind here is this is for granting options, not shares. Granting options is better for many reasons and if you want more information on the difference you can read about that here.

What does EMI
stand for?

The EMI in EMI Agreement stands for “Enterprise Management Incentive” - which, let's be honest probably doesn’t explain a hell of a lot more than the acronym itself. The key word to look at here is “incentive” - indicating that it’s an equity scheme designed to incentivise (we will dive into this a little more later), which is why we think it’s the best option to give to your employees. Aside from that it looks much like any other legally binding document, with its core purpose to grant options to your employees in a tax efficient way, within the UK legal and tax system.

Where does ESOP
come into play?

As above, an EMI scheme is a type of ESOP. ESOP plans are becoming more popular for start-ups to use as they’re more tax advantageous for employees. They also don’t require them to pay anything up-front for maximum motivation and simplicity. There has been some misuse of this term however, with many people saying they have an ESOP plan when in reality they have another form of Equity plan instead. It’s important to make sure you’re only using this term if it really is an Employee Share Option Programme - like an EMI scheme.

What are the eligibility requirements for an EMI scheme?

Because EMI schemes are designed to be compliant and beneficial for your employees, there are some specific requirements you as a business need to meet, and also your employees receiving the equity. We’ve outlined them briefly below but have a more detailed explanation in this article here.

As a business you need to make sure your gross assets are less than £30 million and you have under 250 employees in total when issuing the EMI scheme. Which means if you grow past this (woohoo! That means your business is working!!) the options and EMI agreements that have already been given to your employees are still tax advantageous and the EMI agreement still stands. It’s all about making sure you meet these requirements when setting up your ESOP plan, not limiting the growth after you’ve set it up. Once you’re a company with over £30 million of gross assets and more than 250 employees in total, you will need a different set up for giving out options or Equity to employees past this point, which is a topic for another time!

Your employees will also need to meet some requirements to participate in your EMI scheme - all of which are fairly straight forward. They will need to work at least 25 hours per week or 75% of their working hours and not have a material interest - i.e not own more than 30% of the company or of its subsidiaries.

It’s important to keep in mind that if your employees stop meeting these requirements, it may mean the scheme becomes invalid. This is a pretty rare situation, and if you’re working with us we can help navigate any changes to employee situations with you and them to ensure they’re not losing out on the shares and interest within the company.

Another important thing to note is that an EMI scheme can only be granted to employees, not consultants, directors etc. Hence why it falls under ESOP (Employee share option plan)

Why is it the best scheme to use?

There are many reasons why EMI is the best scheme to use and we’re going to break down the primary reasons below:

Tax

With EMI there is no income tax requirements your employees need to pay when the options are granted or when the options are exercised to buy if everything has been set up properly (you can read a little more about timing in our blog here, as this can also have an impact on employees financial obligations with the options/shares.)

If and when an employee sells their shares, they will also keep the majority of the profit - usually about 90% - without the EMI agreement in place they would be left with most likely less than 50% of the profit.

The company itself also benefits from this - with a tax credit which is offset against its year-end tax bill.

Compliance & HMRC

For a full breakdown on HMRC you can check out our article here. The main benefit of this is compliance. Under EMI regulations you agree and share your companies valuation with HMRC, meaning it’s registered with a third party entity at the date the options are first awarded. This value is then valid for 10 years, which often results in employees paying very little for their shares and paying no income tax. This makes it far more beneficial for them as an actual benefit rather than an obligation. This does mean that the earlier you set your EMI scheme for your employees the better, as the value of the business could be - on paper - very small before finance rounds and revenue starts to be generated, meaning more benefit for your employees, again this is outlined further in this article here.

Flexibility

EMI schemes can be set up to suit the business and employee needs - with key variables to be decided it’s basically up to you with how you want to go about the details. We have plenty of data on industry standards and best practices for the optimum results, which is part of the discovery period we go through with all our start-up partners. With EMI you can grant options to selected staff or a more widespread number, and the agreements themselves can be tailored from % you give to each employee to the type of exercise or exit you want to stipulate, alongside the vesting periods. If this all sounds confusing feel free to give us a call and we would be happy to run you through in some more detail.

Incentive

Arguably the most important benefit is Incentive. We touched on this earlier with the breakdown of what EMI (Enterprise Management Incentive) stands for. With all of the above elements coming together, having an EMI plan keeps employees engaged in the business and becomes a key incentive for them to stay to receive all their options. This is because the upside of staying means a payout without them having to fork out or pay significant tax on that payout. This seriously helps with employee retention, especially since the employees you typically give equity too are the key players in your business. EMI can also help offset the additional risk employees take for working at a start up and be another way to bulk up the employees ultimate package. To read more on employee retention and attracting the right candidates with equity you can check out our article here.

Motivation

Last but not least - and very much related to incentive is motivation. Motivation is why we got into this business, and it’s a fairly important component for your company to have right if they want to achieve their BHAG’s and keep their team invested in the long term growth and success of the business. We’ve spent a lot of time looking into motivation theory and have a great understanding of how to strike the balance between intrinsic and extrinsic motivation (more on that here). Equity can become your company’s biggest motivation tool, but if handled incorrectly can also become a massive de-motivator too. With EMI schemes you’re banking on all the above benefits coming into play to really make sure the agreement you want to give your employees stands up for long term motivation. When working with us we also double down to make sure they understand what it's about and everything that it’s related to - as it’s hard to be motivated by something you don’t really understand.

Why doesn't everyone
have an EMI Scheme?

A lot of founders set out to create an EMI scheme but get bogged down with other responsibilities and jobs, meaning It falls to the bottom of the pile. We think the main reason this is, is because of time constraints and the HMRC.

The good ol’ tax man is someone we like to avoid and the idea of staying compliant can be daunting. In reality it’s not a huge task to file your compliance checks with the HMRC and it’s also something we can help you with when working with us. We know the drill, we’ve done it before and are happy to walk you through all the steps.

HMRC and compliance shouldn’t be a deterrent for setting up the best scheme for your employees and your business. You can read a little more about what exactly HMRC is here. When it comes to lacking in time, this is why sometimes the best option is to outsource it. This way you can ensure you’re getting a compliant EMI scheme, handled efficiently, by people who know the ins and outs of the requirements.