CC Consulting writes...Equity incentives like EMI share options are becoming an increasingly popular way for growth-focused startups and scale-ups to motivate, retain and reward talent. EMI scheme share options give employees statutory tax relief on their earnings while enabling employers to create attractive incentives for bringing more staff on board, even those who are skilled and based overseas.
Companies can design and implement bespoke EMI schemes which align employee goals with business growth objectives. These types of share option schemes can be particularly suited to smaller and medium-sized businesses undergoing a period of rapid growth, but they can suit businesses of all sizes.
This short guide is here to explain why you may wish to consider adopting a similar scheme for your hardworking and loyal staff.
How do EMI Share Option Schemes Work?
EMI share option schemes allow companies to grant options to employees to acquire shares at a discounted price in the future.
Here's a quick overview of how EMI schemes work:
- The company grants EMI options with an exercise price typically set at the current fair market value.
- These options vest over a period of time (e.g. 2-4 years) to incentivise long-term retention.
- Once vested, employees can exercise their options to buy company shares at the preset exercise price.
- Exercising the options allows them to gain equity in the company, at below full market value.
- If the share price has increased by the time the options are exercised, employees can realise a capital gain by selling the shares.
With the right professional, legal advice on EMI schemes, companies can seamlessly roll out EMI plans that motivate and reward talent.
However, proper implementation is key - EMI schemes must meet various qualifying criteria and be registered with HMRC to access tax benefits. EMI schemes can be used by quoted or unquoted companies with £30 million or below in gross assets. Companies must have fewer than 250 full-time employees who work at least 25 hours a week (or 75% of their total working time) for the company.
Are EMI Share Options Worth It?
For many growth-focused companies, EMI share options are well worth considering:
- Tax incentives - like Capital Gains Tax (CGT) exemptions - make EMI very attractive for employees both existing and new, which can improve talent retention and hiring rates.
- Tying compensation to equity value incentivises employees to increase productivity and performance, and participate in the business’s growth journey.
- EMI options help startups with limited cash flow attract top talent through ownership incentives and upside potential.
- Equity participation facilitates succession planning by retaining promising future leaders. It also cultivates a growth-focused mindset amongst the team.
However, EMI schemes must be implemented properly to access all the relevant, applicable tax benefits - getting expert legal and financial advice is recommended.
Overall though, for eligible companies, EMI share options can be an impactful way for businesses to set themselves apart from competitors and attract more promising top talent to their workforce.
Why EMI Share Options are Attractive Employee Incentives
Let’s look at some of the inherent advantages of EMI share options in a bit more detail.
Align Employees with Business Growth
EMI schemes enable employees to become shareholders, acquiring a stake in the company's growth journey. By tying compensation to equity value rather than just salary, you incentivise employees to increase productivity, retention and business performance.
EMI share option schemes promote widespread growth alignment:
- With a vested interest in the company's success, employees are motivated to work harder and smarter. There is a shared vision to grow the company.
- Equity schemes make hiring and retaining top talent easier by offering ownership incentives beyond just competitive salaries and remuneration. This incentive is especially advantageous for startups that are competing against established brands and corporations.
- Business leaders can reward and recognise outstanding contributions by early employees who took a chance on a fledgling business.
- Equity earn-ins over time can help retain key staff for future managerial or leadership roles.
Significant Tax Advantages for Employees
EMI schemes come with favourable tax treatments that make share options even more attractive. For many qualifying companies in certain sectors, the tax relief comes as a welcome opportunity for both businesses and individuals.
Unlike normal employee share options, there is no income tax when EMI options are originally granted. Employees would only need to pay income tax on granted shares when they are sold.
Additionally, any gains made from selling EMI shares after meeting the qualifying criteria are free from CGT. Employees can, in turn, see a greater financial return from the share values built up in equity. There are some instances when CGT would apply on the sale of EMI shares, but it is typically charged at a capped rate of 10% rather than normal income tax rates of 20-45%.
Employees can subsequently claim capital losses relief if their EMI share options lapse having not been exercised. This gives them additional peace of mind when the risks associated with equity compensation are mitigated. If EMI shares come with restrictions at sale time, employees may be able to claim income tax relief of up to £30,000 per year.
Combined, these tax breaks significantly enhance the financial upside for employees who are offered EMI options.
Flexible Terms to Incentivise Diverse Contributors
EMI schemes give companies the flexibility to tailor options based on role, seniority and contribution.
They can decide on the following:
- Vesting periods - Vesting schedules, such as monthly or annual vesting over a period of a few years, help retain employees over a longer stretch of time. The longer and more reliable the vesting schedule, the more likely that interested employees will commit to the business.
- Performance targets - Equity grants can be conditional on hitting business or personal KPIs, creating an incentive to deliver growth. Staff who hit or exceed their company or individual KPIs can expect to see sufficient remuneration for their efforts, which is handy in businesses that operate in sectors that fluctuate greatly.
- Differentiated grants - The board can make larger grants to key C-suite executives and technical experts who make an outsized impact on the company's success.
- Broad-based participation - EMI options can be offered to a wide range of employees, not just senior executives, promoting a culture of ownership.
This ability to customise the EMI terms allows you to effectively incentivise diverse contributors based on their role and impact on value creation.
Aligning Employees with Your Growth Journey
With the UK's favourable treatment of EMI equity incentives, it makes sense for ambitious startups and scaleups to consider implementing schemes.
With the right legal guidance on compliance and maximising advantages, your company can craft an EMI scheme that recruits talent, drives growth and rewards employees.
