Share options and EMI schemes

Share options and EMI schemes

Share options are a great way for entrepreneurs to share some of the benefits of equity ownership with key employees, and can be hugely motivating.

What are share options?

Share options are a right to acquire share in the company, usually at the point of exit. The options, normally don’t have any value before exit. Equally, they don’t carry any of the other rights that normal shareholders would have. So for example, option holders aren’t entitled to take dividends, vote in company meetings or get access to the company’s financial information. But they do mean that employees benefit from a meaningful realisation of value at the point of exit, when the founders decide to sell.

Share options also have the benefit of only being valid if the employee remains in employment, avoiding the tricky situation that might arise from an employee with normal shares leaving to join a competitor or starting up on his or her own.

What types of share options are there?

There are 4 types of share option schemes which are approved by HMRC, which are worth considering at the outset:
1. Share Incentive Plan (SIP)
2. Save you as you Earn (SAYE)
3. Company Share Option Plan (CSOP)
4. Enterprise Management Incentive (EMI)

There is also the possibility of creating a more bespoke unapproved scheme, which allows options to be awarded to consultants and contractors, or in subsidiary companies, but the tax treatment of these scheme is likely to be less favourable than an approved scheme.

Which scheme is best for my company?

By far the most common share option scheme used by entrepreneurs is the Enterprise Management Incentive – the EMI scheme. EMI options are particularly flexible and tax efficient and work very well for unlisted privately owned companies.

EMI schemes have a number of particular advantages over the other schemes. Firstly, the scheme is discretionary, so that different numbers of options can be granted to different employees. Secondly, they are tax efficient for both the company (which can claim corporation tax relief), and the employees who normally pay just 10% capital gains tax as long as they hold the options for 10%. EMI options can be granted free for employees, and employees won’t lose anything if the exit doesn’t go as planned.

There are certain restrictions to EMI schemes – the company must be mainly based in the UK, have fewer than 250 employees and gross assets of less than £30 million, and there are some sector specific limitations.

For businesses too large to qualify for EMI scheme, the Company Share Option Plan is often the best choice.

If you are keen to offer the scheme to all employees on equal terms, then a SIP might suit you best. This allows employees to buy small amounts of shares each year from pre-tax salary. These shares are held in an Employment Benefit Trust and are normally sold back to the EBT when the employee leaves the company, and these schemes work particularly well if the company is already listed.

The SAYE scheme is similar in that it is also open to all employees, but offers the chance for employees to buy share options on a monthly basis from their pre-tax income and requires a commitment to continue to do so for 3 or 5 years. The price paid for the shares can be up to 20% lower than the current market value. When the option matures, the employees can either buy the shares agreed at the date of the option contract, or ask for the savings to be repaid – making it risk free for the employees.

We can help

So if you own a growing company and would like to explore ways to motivate, inspire and retain your best employees, please don’t hesitate to drop us a line. Because we have accountants and solicitors in house, we’re uniquely placed to be able to the maths and the legal paperwork, not to mention the tax, all in one place, to make sure that you get it exactly right.