EMI Option Agreement

What is an EMI option?

An Enterprise Management Incentive (EMI) share option scheme is a tax favourable employee share option scheme that enables shares purchased via an EMI option to qualify for Entrepreneurs Relief. The scheme is specifically targeted at small to mid-sized businesses to help them recruit and retain staff.

The option gives the employee the right (but not the obligation) to buy a certain number of shares for a particular price at a later date. Typically the option will be subject to a vesting schedule, which means that the employee will receive the options over a number of years.

What is an EMI option agreement?

The EMI option agreement details the terms and conditions attaching to the grant of the option. The option agreement can either include all of the rules that apply to the option or refer to a separate document, known as the scheme rules, that includes all the rules. It is more common for companies to create a general set of scheme rules that apply to all the EMI options granted by the company rather than including the rules in each employee’s option agreement. This has two clear benefits. First is transparency - all employees know that they are being issued options subject to the same rules. Second is administrative - should the company need to make administrative updates to the rules, this can be done by updating the general rules rather than having to agree the update with each employee individually.

When should you use an EMI option agreement?

In order to qualify for the tax benefits of an EMI scheme, the details of the scheme must be set out in writing and agreed to by way of a written agreement between the company and the employee. It is therefore necessary to use some form of option agreement (either a long form agreement or an agreement that sets out the number of individual options granted to the employee but refers to the general scheme rules) each time the company grants options to the employee.

Why should you use an EMI Option Agreement?

EMI schemes are one of the most tax efficient forms of share scheme that can be put in place by a company. However, there are a number of requirements that a company must satisfy to be able to issue EMI options. In particular: 

• The company must have:
• Gross assets of £30 million or less;
• 250 or less employees; and
• A permanent establishment in the UK;
• The company cannot be a subsidiary company - ie 50% or more of the company’s shares cannot be owned or controlled by another company; and
• The scope of the company’s business cannot mainly be any of the following:
• Banking;
• Farming;
• Property development;
• Provision of legal services; and
• Ship building; and
• The value of all stock options issued by the company may not exceed: 
• £3 million of unexercised options at the time of grant; and
• £250,000 per employee/director.

Further, the employee receiving the options must work at least 25 hours or devote at least 75% of their total weekly working time to the company and cannot own more than 30% of the company’s shares.

If the company is able to grant EMI options, it should consider granting options to attract and retain talent. Options both offer a competitive, cost effective, alternative to salary but also align the employee’s long term interest with that of the company. The result is a workforce that is motivated to grow the company. 

What are the common pitfalls of an EMI option agreement?

The most common pitfall is failing to comply with the statutory requirements necessary for the option to qualify as an EMI option. If these are not met, the favourable tax treatment will not apply with potentially large financial consequences for both the company and the employees. These statutory requirements apply both to:

• the option agreement - the agreement must include details of the grant date, the number, or maximum number of shares under the option, the exercise price (or the method for determining it), and when and how the option may be exercised; and 
• the processes that must be followed when granting options - for example, the employee must be provided with a signed copy of the agreement within 14 days of the agreement being executed. 

Missteps such as this can be easily avoided by using PocketLaw, with its combination of clear guidance, integrated e-signing and smart collaboration tools.

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