Employee Options and EMI Schemes Explained

The Core Design Challenge

An EMI scheme is a government-approved share option scheme. Employees are granted the right (an "option") to buy shares in the company at a fixed price (the "exercise price" or "strike price") at a future date, usually subject to performance or time-based vesting conditions.

The key advantage: if structured correctly, the growth in value from grant date to exercise is taxed as a capital gain (currently at 10% under Business Asset Disposal Relief for qualifying disposals) rather than income (up to 45%). For a senior hire with a significant option package, this difference can be worth hundreds of thousands of pounds.

The company must:

• Have gross assets under £30m

How the Approach Works

• Have fewer than 250 full-time equivalent employees

• Not be under the control of another company (i.e., be independent)

• Carry on a qualifying trade (most activities qualify; banking, legal, and property development do not)

The employee must:

Governance and Implementation

• Work at least 25 hours per week for the company, or at least 75% of their working time

• Hold (with associates) less than 30% of the company's shares

• Not hold options worth more than £250,000 (based on unrestricted market value at grant)

Options typically vest over a 4-year period with a 1-year cliff. This means: nothing vests in year one, 25% vests on the first anniversary, and the remainder vests monthly or quarterly over years two through four. If the employee leaves before the cliff, they lose all unvested options. After the cliff, they retain any vested options (depending on whether they're a "good leaver" or "bad leaver" under the option agreement).

Putting It Into Practice

Good leavers (redundancy, ill-health, death, retirement, or sometimes mutual agreement) typically retain their vested options and may receive accelerated vesting on unvested options. Bad leavers (resignation, termination for cause) typically lose all unvested options and may lose vested ones too. These definitions are negotiated in the option agreement and vary significantly — get legal counsel involved.

For an EMI scheme to be valid, HMRC must agree the unrestricted market value (UMV) of the shares at the point of grant. This is done by submitting a valuation methodology to HMRC's Shares Valuation team. For an early-stage company, the UMV is typically discounted significantly from the most recent funding round price to reflect minority interest and lack of marketability — often 10–40% of the Series A price. Get this right from the start, or your scheme will generate an unexpected tax bill for employees on exercise.

On an acquisition or IPO, option holders typically exercise their options (paying the strike price) and receive shares, which are then converted to cash or acquirer stock. Under BADR, employees who have held the options for at least two years and worked for the company for at least two years pay CGT at 10% on the gain. This is the outcome your candidates are modelling when they decide whether to join. Make sure you can explain it clearly.