Table of Contents
- What is the Enterprise Management Incentive (EMI) Scheme?
- Advantages of Implementing the EMI Share Options Scheme
- 1. Attract and Retain Talented Employees
- 2. Tax Benefits
- 3. Flexibility
- Disadvantages of Implementing the EMI Share Options Scheme
- 1. Administrative Burden
- 2. Poorly Implementing the Scheme Can Impact Exit
- 3. Some Startups are Ineligible for the Scheme
- 4. Market Risks
- Key Takeaways
- Frequently Asked Questions
An employee share scheme can motivate your employees and increase their performance. Offering stakes in the company’s future growth is also a great way to attract and retain talented staff. As an owner of an SME, one of the schemes you could opt for is the Enterprise Management Incentive (EMI) scheme. This scheme is a popular option for startups in the UK. This article explains the EMI options scheme and its advantages and disadvantages.
What is the Enterprise Management Incentive (EMI) Scheme?
Many startups across the UK have adopted the EMI scheme. This scheme allows companies to grant share options to their employees. Options give them the right to purchase shares later, usually at a predetermined price.
Several alternative schemes are available, but the EMI scheme is the most popular. The UK government supports this scheme, and your startup would require HMRC’s approval to participate.
Advantages of Implementing the EMI Share Options Scheme
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1. Attract and Retain Talented Employees
Offering options can make your startup attractive to potential employees and help you retain current staff. Employees with a stake in the company will likely be more motivated and committed to contributing to its success.
2. Tax Benefits
Participating employees can benefit from significant tax advantages through this share options scheme. They will most likely not pay income tax when they exercise their options and receive shares.
3. Flexibility
The EMI scheme offers flexibility. You can tailor it to suit your startup’s specific needs and goals.
For instance, you will set the rules on how the scheme will work, including what will happen to the options if an employee leaves or you sell the company.
Disadvantages of Implementing the EMI Share Options Scheme
1. Administrative Burden
Setting up and maintaining an EMI scheme requires careful administration and compliance with HMRC regulations. The administrative side can be time-consuming and potentially costly.
Furthermore, an accurate valuation of your startup will be necessary to set up the scheme, which can involve additional costs and complexities.
2. Poorly Implementing the Scheme Can Impact Exit
If you have well-documented and implemented the EMI scheme, selling your business can be more accessible. Suppose that when conducting their due diligence, a potential buyer finds that you need complete records or sufficient information detailing the scheme. In this case, they may be reluctant to complete the sale.
To mitigate this risk, keep all the relevant documents together. These might include:
- an outline of the scheme;
- signed agreements;
- letters and other communications from HMRC; and
- all other documents relating to the scheme.
3. Some Startups are Ineligible for the Scheme
Your startup may not qualify for the scheme if it participates in certain activities. For example, if you own a property, banking or farming startup, it will be ineligible.
In addition to the eligibility requirements for your startup, employees must also meet a set of criteria to be eligible for EMI options.
4. Market Risks
The value of share options depends on your company’s future performance, which can be uncertain. Employees might not realise the benefits they expect if your startup’s valuation does not increase as they anticipate.
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Key Takeaways
The EMI scheme offers UK startups a way to incentivise their employees. While the scheme provides numerous benefits, it can also have challenges and complexities.
Advantages of the scheme include the following:
- the ability to attract and retain talented employees;
- employees tend not to pay income tax when exercising their options; and
- flexibility in structuring the scheme.
Disadvantages include the following:
- the administrative burden of starting and maintaining the scheme;
- a poorly documented scheme can impact your ability to sell the business; and
- some startups are ineligible to participate.
Before implementing the scheme in your startup, you should carefully weigh these advantages and disadvantages. Doing so will help you decide whether it is the right choice for your business. It can be particularly beneficial to seek expert advice to minimise the risks associated with this incentive tool.
If you would like legal advice about EMI schemes or alternative employee share schemes, our experienced startup lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
This type of share option scheme allows startups to offer their employees equity in the company (usually at market value). This is usually beneficial when startups have not raised enough capital to give their employees competitive salaries.
In the UK, the EMI scheme is only available to companies with a permanent establishment. This can be a single operating company, a holding company of a group, or a UK subsidiary of an overseas company.
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