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If you’re looking for a way to attract new talent to your business, retain your staff or offer something of value to your staff and team members, an EMI might be a good option. In this guide we’ll explore what an EMI share option scheme is, and how it can benefit your business. 

What is an Enterprise Management Incentive (EMI)?

An EMI share option scheme enables businesses to attract and retain top-tier talent by offering them the opportunity to acquire shares in a company. This scheme is specifically designed for small to medium-sized enterprises (SMEs) and operates within the framework of Enterprise Management Incentives approved by HM Revenue and Customs (HMRC).

Under this scheme, employees are granted the option to purchase shares in the company at a predetermined price, often referred to as the "exercise price." The allure of EMI schemes lies in the potential for employees to benefit from the company's success as the company increase in value over time.

Advantages of an EMI share option scheme

  • Employee motivation and retention
  • Tax advantages
  • Flexible terms

1. Employee motivation and retention

EMI schemes serve as powerful tools for motivating and retaining key employees. By aligning employee’s interests with the company's success, employees are more likely to remain dedicated and focused. 

2. Tax advantages

From a tax perspective, EMI schemes can be highly beneficial. The gains made by employees when they exercise their options are often subject to lower capital gains tax rates. The company also often receives corporation tax relief,  making it an attractive option for both employers and employees.

3. Flexible terms

EMI schemes offer flexibility in structuring the options, allowing businesses to tailor the scheme to their specific needs. This adaptability makes it suitable for a variety of business models and sizes.

Disadvantages of an EMI share option scheme

  • Complex administration
  • Dilution of ownership
  • Market fluctuations

1. Complex administration

Setting up and managing an EMI scheme involves intricate administrative processes. From obtaining HMRC approval to ensuring compliance with regulations, the complexity may pose a challenge for small businesses with limited resources. Small businesses are likely to need assistance from legal, accounting and tax specialists which could be potentially costly to the business.

2. Dilution of ownership

As employees exercise their options and acquire shares, there is potential for dilution of ownership among existing shareholders. This may not be an issue for some businesses, but it's essential to carefully consider the impact on overall ownership structure.

3. Market fluctuations 

The success of an EMI scheme is closely tied to the company's performance in the market. Economic downturns or other external factors can influence the value of shares, impacting the effectiveness of the scheme as a motivational tool.


Speak to a lawyer about share options


How do I set up an EMI share option scheme?

If you want to grant EMI options, there are several steps involved. It's crucial to follow the process diligently to ensure compliance with HMRC regulations:

1. Eligibility check

Confirm that your business qualifies for EMI schemes. Generally, SMEs with gross assets not exceeding £30 million are eligible. Your employees will also have to meet eligibility criteria, including working a minimum of 25 hours per week.

2. HMRC notification 

Notify HMRC of your intention to set up an EMI scheme. This involves submitting necessary documentation and gaining approval.

3. Valuation of shares 

Determine the market value of the shares to be offered. This valuation is essential for calculating the exercise price and ensuring compliance with HMRC requirements. You should obtain expert advice to help you set the correct valuation. 

4. Create the Option Agreement

Draft a comprehensive Option Agreement outlining the terms and conditions of the scheme. This document should cover details such as exercise price, vesting periods, and any conditions for share acquisition.

5. Employee communication

Transparent communication with employees is crucial. Clearly explain the benefits of the EMI scheme, the terms involved, and the potential tax implications.

6. Submission to HMRC

Submit the option agreement and relevant documentation to HMRC for approval. This step is crucial to ensure that the scheme qualifies for EMI tax advantages.

7. Employee exercise of options

Once approved, employees become option holders. They can exercise their options by purchasing shares at the agreed-upon exercise price.


Free EMI Option Agreement template


What else do I need to know?

Embarking on the journey of implementing an EMI share option scheme requires careful consideration and understanding of the legal nuances involved. Here are key points to keep in mind:

  • Compliance is key – strict compliance with HMRC guidelines and timescales are paramount
  • Communication is crucial – clearly communicate the details of the EMI scheme to employees 
  • Professional advice – Seeking legal and financial advice is highly recommended
  • Regular review – Periodically review the performance of the EMI scheme

What are alternative options to an EMI share option scheme?

​​While Enterprise Management Incentive (EMI) share option schemes can be powerful tools for attracting and retaining talent, they might not be suitable for every business. Fortunately, there are alternative methods for businesses to incentivise and reward employees. 

1. Share purchase plans

Instead of offering stock options, businesses can implement share purchase plans that allow employees to buy company shares at a discounted price. This provides employees with a sense of ownership and alignment with the company's success. The discounted purchase price can be an attractive incentive.

2. Performance bonuses

Establish performance-related bonuses tied to individual or team achievements. These bonuses can be monetary or in the form of additional benefits. This directly ties rewards to performance, promoting a culture of excellence. Simpler to administer than equity-based schemes.

3. Profit-sharing schemes

Distribute a portion of the company's profits among employees. This can be done on a periodic basis, such as annually. This fosters a collective sense of responsibility for the company's success. This also aligns rewards with overall financial performance.

4. Employee Stock Purchase Plans (ESPPs)

ESPPs allow employees to purchase company shares at a discounted rate, often through payroll deductions. Similar to share purchase plans, ESPPs encourage ownership and loyalty. The discounted purchase price can be a compelling incentive.

5. Performance shares

Instead of options, grant employees actual shares that vest based on performance milestones or the achievement of specific goals. This provides tangible ownership to employees. Again, this aligns incentives with company performance without the complexity of stock options.

6. Cash bonuses

Offer one-time or recurring cash bonuses based on individual or team accomplishments. These are immediate financial rewards for employees. Simple to implement and administer.

7. Employee recognition programs

Implement programs that publicly acknowledge and reward outstanding employee contributions, whether through awards, ceremonies, or other forms of recognition. This boosts morale and employee engagement, and doesn't involve complex equity structures.

8. Employee benefits and perks

Enhance employee benefit packages, offering perks such as flexible working arrangements, professional development opportunities, or additional time off. This improves overall job satisfaction and work-life balance. This appeals to employees seeking a holistic approach to rewards.

9. Deferred compensation plans

Allow employees to defer a portion of their salary into a plan that pays out at a later date, often upon retirement or reaching specific milestones.This provides long-term financial incentives. This appeals to employees with a focus on future financial security.

10. Phantom share plans

Create a synthetic equity plan where employees receive hypothetical shares that mirror the value of company shares without actual ownership. This offers the benefits of equity appreciation without the complexities of actual share ownership. These plans can be cash-settled.

Considerations when choosing alternatives

  • Company culture – select an incentive that aligns with the company's values and culture
  • Budgetary constraints – evaluate the financial implications of each incentive
  • Legal and regulatory compliance – ensure that the chosen incentive is compliant
  • Communication – transparently communicate the chosen incentive program to employees
  • Flexibility – choose incentives that can adapt to the evolving needs of the business

Get legal support from LawBite

An EMI share option scheme can be a valuable tool for small businesses in the UK, providing a means to attract, motivate and retain top talent. While the advantages, such as tax benefits and employee motivation, are compelling, businesses must also navigate the complexities involved in setting up and managing these schemes.

Considering legal assistance for establishing an EMI share scheme? Look no further. Our corporate lawyers specialise in all aspects of business law and are well-versed in the intricacies of setting up share schemes. Kickstart the process by booking a free 15 minute call with one of our expert lawyers, or simply give us a call on 020 3808 8314.. We're here to guide you through the nuances, ensuring your EMI share scheme is structured with expertise and precision.

Additional resources

In closing

Nothing in this article constitutes legal advice on which you should rely. The article is provided for general information purposes only. Professional legal advice should always be sought before taking any action relating to or relying on the content of this article. Our Platform Terms of Use apply to this article.

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