EMI share option schemes – In a nutshell, expert advice from Jerry DavisonClick here to view the transcript
Option schemes are ideal for incentivising employees to stay with the company as it grows, over the longer term, and share in a successful exit.
For example, Carrie is granted 10,000 options today, priced at £1 per share. Five years later the company is sold, for £5 per share. She buys her shares for £10,000, sells for £50,000, and makes a £40,000 profit.
When the shares are sold, the downside of course is that tax will be payable on the profit. An employee could be liable for income tax and national insurance of up to 50% or more.
Luckily for employees an excellent Government scheme called the EMI, or enterprise management incentive, can save a huge amount of tax. It means that option holders should not have to pay any income tax or NI, and instead when they sell their shares they pay only 10% capital gains tax.
In Carrie’s case, normally she might have to pay over £20,000 in tax on her £40,000 profit; under EMI she pays only £4,000.
EMI option schemes are very flexible – for example you could designate the options as ‘exit only’ such that the employees can only buy their shares on the date that the company is sold, or alternatively they can buy them in slices over a few years. You can grant options to selected staff such as key managers, or to a more widespread number.
To qualify for EMI, the company must have fewer than 250 employees and option holders must work for the company for at least 25 hours a week.