Employee Share Schemes (EMIs)

Employee incentive schemes are an effective way to recruit, motivate and retain employees. They can also have the added benefit of being tax-efficient and cost effective.

An employee share scheme is a way of sharing ownership with your employees by giving them equity (shares) in the company now or an option to purchase shares in the company at a future date.

At Herrington Carmichael we have specialist EMI Scheme Lawyers who can help you. If you would like to know more about EMI Schemes or how they could work for your company then contact us online or 01276 686 222

What is a share scheme?

A share scheme is a way of founders sharing equity with employees. Equity in a company means ownership – anyone who holds shares in a company owns part of the company (and therefore its assets).

There are many different forms of share scheme, but they all work in one of two ways:

Equity now – employees are given actual shares in the company now

Equity later – employees are granted an option which gives them a right to purchase shares in the company at a certain point in the future (at an agreed price)

Why set up an employee share scheme?

There are many benefits associated with shared employee ownership for businesses. The most common reasons we see employers wanting to set up schemes include:

  1. Recruitment of top talent, particularly when the recruitment market is tough
  2. Retention of the best talent
  3. Creation of an ownership culture amongst employees
  4. To motivate employees to improve their performance and productivity
  5. Reward employees (similar to a cash bonus scheme)
  6. To keep up with competitor firms in the industry
Which type of share scheme is right for my business?

The best share scheme for a business will depend on its size, industry, employees and motivations for implementing a scheme. Some examples of recent share schemes we have helped clients with include:

Company 1: start-up business where the founder shareholder brought in an employee who he wanted to motivate to grow the business with the aim of a sale in 8-10 years. We assisted the company in obtaining a valuation for EMI purposes from HMRC of £1 per share. EMI options were granted to the employee who can exercise them on a sale of the company.

Company 2: a founder shareholder wanted to reduce his shareholding over time for personal tax planning reasons and to pass on ownership to employees. The company did not qualify for EMI due to operating an excluded trade but did qualify for a CSOP scheme. Some employees were family members so did not qualify for beneficial tax treatment of CSOPs, but instead received unapproved options.

Company 3: company had an existing EMI scheme exercisable by employees on a sale of the company. The shareholders decided they wanted some longstanding overseas employees and consultants to also benefit from the sale. Immediately prior to sale, those employees and consultants were granted unapproved options which were exercised on the sale.

Company 4: company currently valued at £11m wanted to motivate its management team to participate in the future growth of the business. The management team were issued with growth shares which only entitle them to a return on any amounts in excess of £11m when the company is sold.

Why should startups offer equity?

Share schemes can be equally, if not more, beneficial to startups with few employees than to large companies with many employees. Setting up a share scheme early on can assist with:

  • Ownership mentality
  • Recruitment & retention
  • Value

Read our Employee Share Scheme Guide for Startups >

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    Employee share schemes (EMIs) FAQs

    What is the difference between a "share scheme" and an "option scheme"?

    A share scheme is a way to give employees actual shares in the company today. An option scheme gives employees the right to exercise their option and receive shares in the company at a certain point in the future e.g. when they hit a certain performance target or when the company is sold.

    What are the different types of share schemes?

    There are various types of scheme, some of which are suited to larger companies and some more suited to small companies or start-ups with only two or three founders.

    Four of the available schemes are “approved” by HMRC which means that they are tax-efficient for the employees receiving shares/options. These are:

    1. Enterprise Management Incentives (EMIs)
    2. Company Share Option Plans (CSOPs)
    3. Share Incentive Plans (SIPs)
    4. Save As You Earn (SAYE)

    EMIs are probably the most popular, particularly with start-ups and in IT / technology industries. Other schemes are “unapproved” and are potentially not as tax-efficient. These include:

    1. Growth shares
    2. Unapproved share options
    3. Employee ownership trusts
    4. Nil paid shares
    How to set up an EMI Scheme

    If you are a founder of a startup or an early-stage business and are thinking about sharing equity with your team, we can help you explore the different options available and implement your chosen scheme. If you would to discuss further, please contact Yavan Brar in our Corporate team.

    Structuring Employee Share Schemes to drive your business’ goals

    The key to the success of many businesses is ensuring that they can get the best out of their people.

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