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As a founder, understanding the value of your company’s shares is essential, especially when implementing equity plans like the Enterprise Management Incentive (EMI) scheme. Unrestricted market value (UMV) forms part of this valuation. This article will explain unrestricted market value, what it means for your company’s equity plans and the legal implications you should consider.
What is Unrestricted Market Value?
Unrestricted market value (UMV) is the fair market value of shares without restrictions. It refers to the price at which your company could sell shares on the open market to willing buyers without considering any limits on their use or transferability.
Key features of UMV include the following points:
- it reflects the intrinsic value of the shares;
- this value determines the tax treatment of share options under the Enterprise Management Incentive (EMI) scheme; and
- calculating UMV involves considering company performance, financial projections, industry conditions, and market trends.
The UMV of shares determines the amount of options your company can grant to its employees under the EMI scheme. It can also determine the tax treatment of options upon exercise.
What is the Difference Between Actual Market Value and Unrestricted Market Value?
Actual market value (AMV) is the value of shares considering any restrictions or conditions affecting their marketability. It determines the exercise price of share options. AMV is usually lower than the UMV due to the consideration of restrictions when calculating it.
UMV and AMV are necessary in calculating the value of shares and the tax those exercising options will pay.
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The Importance of UMV in Equity Plans
Understanding UMV is crucial for founders implementing equity plans for several reasons, including tax implications and ensuring HMRC compliance. Regarding tax implications, the UMV of shares determines the tax treatment of shares for employees receiving options under EMI and Company Share Option Plan (CSOP) schemes. Regarding compliance, accurate UMV calculations ensure your company adheres to tax regulations. Accuracy also mitigates the risk of potential disputes with HMRC and your employees further down the line.
Legal Considerations
1. Valuation Accuracy
You must calculate UMV and AMV accurately. An accurate valuation and HMRC approval will provide certainty over tax treatment upon the exercise and sale of actual shares. An accountant can help you generate this valuation. Inaccurate valuations can lead to unexpected tax liabilities and expose you to the risk of costly legal disputes.
2. HMRC Approval
When implementing the EMI scheme, you should seek HMRC approval. This step significantly reduces the legal risk granting options poses to your company and its employees. You must complete a VAL231 form to seek approval, including the shares’ UMV and AMV on the form. Following approval, your company has 90 days to grant options.
3. Seek Professional Advice
Seeking professional financial and legal advice when implementing an employee share scheme is crucial. An accountant can help you to ensure you do the following:
- choose the most suitable scheme for your company;
- have an accurate valuation of shares;
- complete necessary forms correctly; and
- properly document the scheme’s implementation.
Seeking legal advice can help you identify and mitigate risks along the way. A lawyer can also help you to redraft crucial agreements, such as employment contracts, to reflect changes in compensation packages.
This guide aims to introduce founders to the UK startup market. It provides extensive insights and practical advice on essential steps for launching your startup in the UK.
Key Takeaways
Understanding your company’s shares’ unrestricted market value (UMV) is crucial for implementing effective equity compensation plans and granting options. Calculating UMV involves assessing the value of your company’s shares without considering any restrictions. This valuation should reflect your company’s overall performance, financial health, and industry trends.
The UMV of shares differs from the actual market value (AMV). Understanding UMV and AMV is crucial to generating an accurate valuation. Accurate UMV and AMV calculations ensure compliance with relevant tax guidelines and mitigate the risk of future legal disputes. The following table outlines the difference between these two values.
| Value | Explanation |
| Actual market value (AMV) | AMV reflects the value of shares, considering any restrictions that may reduce their marketability. |
| Unrestricted market value (UMV) | UMV represents the value of shares without any restrictions. |
When implementing an employee share options scheme, there are several relevant legal considerations, including the following:
- ensuring the valuation of shares is accurate when implementing any share options scheme;
- seeking HMRC approval of your valuation if you are implementing the EMI scheme, as this ensures certainty over tax treatment and significantly reduces the risk of future legal disputes; and
- consulting an expert lawyer and accountant will help you implement the scheme and ensure it is legally sound.
If you would like legal advice about implementing a share or share options scheme in your startup, 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
UMV is the fair market value of shares without any restrictions.
An accurately calculated UMV determines tax implications, ensures compliance with HMRC guidelines, and helps to communicate the value of share options to employees.
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