Research has shown that sharing ownership increases productivity, performance, employee loyalty and happiness, and overall business value. And now it is easier than ever to give your team shares safely, compliantly, and affordably.
There are several ways of distributing equity. Broadly speaking, there are two distinct camps: shares and options.
In this post, I want to talk about options, and specifically, EMI option schemes, which are an incredibly attractive way of distributing equity in a safe, tax-efficient manner.
Why Do EMI Schemes Rock?
It is estimated that 12,000 UK companies have set up an EMI scheme to issue options to their team. Simply put, EMI schemes are a great choice for startups, scaleups and established SMEs that want to reward employees with a slice of the action.
Why? Well, they have massive tax advantages. Your company can offset the entire cost of the scheme against its tax liability. Better still, it’s excellent news for shareholders, as scheme members only have to pay capital gains tax at a lower rate of 10% on an EMI scheme.
The other ways of distributing shares do not come close to this tax position.
EMI schemes are flexible too, both in terms of timeframes and other conditions that you may wish to put in place.
Typically, these options will vest over a four-year period, so they help to engender loyalty in a way that also protects the business. You can, of course, change the vesting schedule, and there are other conditions that you can impose should you wish to do so (e.g. achieving performance-related goals).
Eligibility Of Employees For EMI Share Option Schemes
First off, EMI schemes are for employees only. So if you want to reward non-execs, consultants or other non-employees then one of the other methods of sharing equity will be a better fit.
Employees must meet certain eligibility requirements:
- They must spend at least 25 hours per week or 75% of their total working time as a company employee.
- They may not hold more than 30% of the company’s shares.
- They may not hold options worth more than £250,000 (at the time of grant).
Secondly, there are also rules that the company needs to adhere to before it can even get on the starting block. In summary, a business will usually qualify for an EMI scheme if it meets the following criteria:
- Has fewer than 250 employees.
- Has assets of no more than £30m.
- Is not majority owned or controlled by another company.
- Is not in one of the excluded industries (which include banking, farming, property development, and others.
Here’s a more comprehensive list of EMI qualifications for businesses and employees.
How to Set Up an EMI Scheme (and How Much It Costs To Do So)
You could do it yourself, and Vestd has created a 26-point checklist for setting up an EMI scheme that you can follow if you want to, but it is a complicated area, and it may be best to seek advice from the experts.
Traditionally, you would ask your accountant or lawyer (or both) for help, and they’d charge upwards of £5k for straightforward setup, and much more to manage and execute the scheme. Schemes with more than 30 employees can easily cost more than £20k by the end of their lifetime.
As mentioned, employers can offset these costs against your tax liability, but there is a further complicating factor: compliance. If a scheme is non-compliant, then you can forget about those tax benefits. Setting up a scheme is one thing, but managing it in a compliant way is a whole other story.
Coordinating professional services folk while keeping one eye on the Companies House paperwork and HMRC’s deadlines is the last thing busy founders and CFOs want to be doing, much less using spreadsheets to manage employee share schemes. The risks of something going wrong are considerable.
We estimate that half of all existing EMI schemes are non-compliant. It is a costly mistake waiting to happen that is going to cost shareholders many millions of pounds of unnecessary tax payments in the coming years.
Setting Up an EMI Scheme The Right Way
So then, the good news: as a Seedrs partner we will offer you a 10% discount for the first year of the scheme, and there are no setup fees for new EMI schemes.
If you have an existing scheme and are worried about compliance, then get in touch, as we can conduct a health check and digitise it.
We passionately believe in sharing ownership with employees, and if you do too, then schedule a free call with one of our equity experts. You’ll learn so much about the right – and wrong – ways of distributing equity in just 30 minutes.
Seedrs does not provide legal, financial or tax advice of any kind. If you have any questions with respect to legal, financial or tax matters relevant to this post or your interaction with Seedrs, you should consult a professional adviser.