For early-stage businesses with small teams, it's vital that each employee is motivated, passionate, and has a genuine desire to grow the company. That's why making the right hires is a fundamental task.
In this blog, we’re going to be explaining an effective accounting strategy that can help your business attract and retain high-value candidates – the Enterprise Management Incentive!
The Enterprise Management Incentive (EMI) can be implemented to encourage sought-after employees to join your startup, rather than a large corporation that might even offer a higher salary.
So how does it do this?
The EMI Scheme is a tax-advantaged share option scheme designed for smaller companies, that enables them to attract and retain staff by rewarding them with equity participation in the business.
The initiative is a useful asset for early-stage companies that might not be able to match the salaries paid elsewhere but want to have a similar appeal to high-value candidates.
What Are EMI Schemes and EMI Share Options?
In summary, a share option presents the right to acquire shares in a company, on terms set out in an option agreement.
The option agreement will detail the proportion of shares an employee may acquire, how much they will have to pay for these shares, and when the shares can be acquired through exercise of said option.
For example, option exercise may occur after a specified period of employment, upon the achievement of previously agreed-upon KPIs, or upon sale of the company.
Why do businesses implement EMI Schemes?
From working with hundreds of startups and SMEs, we recognise that early-stage founders are understandably conscious of spending.
In these scenarios, shares or share options can offer a key component of the employment package set out to attract a high-quality team.
A prospective candidate that sees potential in the growth of your business may see significant value in receiving a significant lump sum that would occur through the sale of shares.
In turn, this may incentivise them to join your company, even if the annual salary falls below what a larger company can offer them.
At the same time, featuring the EMI Scheme within your employment contracts allow you to build a scalable team that has a vested interest in the overall success of your business.
Employee share ownership helps to align the interests of a company’s owners with that of its team. All staff under this initiative will be looking to increase shareholder value through growing the business, in the hope that they’ll go on to benefit through sale of their shares or through receiving dividends.
Should Employees Have EMI Share Options or Shares?
The answer to this isn’t quite as clear cut.
In some cases, it will make sense for employees to have shares from the outset. But this will generally involve employees having to pay for their shares, or suffering a tax charge if their shares are gifted to them, or bought at less than full value.
Having share options can be more beneficial for the employee than simply having shares, if the share options are only exercisable upon fulfilment of KPIs.
At the same time, many companies prefer employees not to have shares from the beginning of their contract, because of complications that might arise if they leave the position.
So, overall, the preferred way of doing things is to issue share options rather than upfront shares.
How Are EMI Share Options Taxed?
Good news – the share options are granted are not classed as taxable!
However, for an “unapproved” share option, such as an option without the special tax benefits of EMI or alternative approved share plans, income tax and National Insurance can be charged.
And upon the sale of shares, capital gains tax may be payable on any growth in value since option exercise.
Who Can Receive EMI Options?
EMI options can only be granted to a qualifying employee of a qualifying company, meaning that each company has the discretion to decide which employees should have options, up to a maximum share value of £250,000 per employee (£3 million for the entire company).
Employees (including directors) qualify if they are contracted to work 25 hours per week for their company or, if less, at least 75% of their working time.
This means that a part-time employee can qualify by working a minimum of two days a week for the company, given that work elsewhere does not amount to more than 25% of the whole. Importantly - employees don’t qualify if they already own over 30% of the company.
Most tech startups will qualify for EMI options. A qualifying company or group must be independent, with no other company exerting control over them. At the date of option grant, the company’s gross assets must not exceed £30 million, and it must have less than 250 employees.
The company must carry on a trade and must not (to a substantial extent) carry on excluded activities; such as property investment, and various trades including property, banking, insurance, professional services, leasing and hotels/care homes.
This excluded activity mirrors that outlined under the SEIS and EIS initiatives.
How Does EMI Work in Practice?
From working with expert accountants such Jump Accounting, the business should first assess its eligibility for the EMI Scheme.
If the business does qualify, it should then decide and outline how they plan to implement the EMI scheme, in regard to the options described above.
EMI is a flexible scheme, but the fundamental points your accountant will need to clarify include:
Which employees should be granted options, and over how many shares;
When should options be exercisable;
What type of shares should be subject to options – e.g. should they be ordinary shares or a special share class designed for options, perhaps non-voting shares;
Wow much employees will be required to pay to exercise options and acquire their shares;
What happens if an option holder leaves the company.
Once these issues are decided, formal EMI option agreements should be prepared clarifying the relevant terms. Upon formal approval, signed by the company and its’ employees, congratulations - the EMI options are granted!
Overall, EMI Options are proven to incentivise employees and often increase the motivation and longevity of a team.
Companies missing out on EMI options, particularly those that don’t have the budget to rival large corporation jobs, may be at a disadvantage when it comes to recruiting a scalable, passionate team.
If you haven’t already, maybe now’s the time to consider implementing an EMI Options Scheme.
Reach out to our trusted partners at Jump Accounting to find out how you can action EMI Options, and the many other accounting tools that can elevate your startup.