The Enterprise Management Incentive (EMI) scheme is a very popular equity compensation offering among the start-up community in the UK. It gives growing businesses the opportunity to attract and retain top talent by awarding equity incentives which come with significant tax benefits.
Today, we’re going to look at a checklist of what you should be including in your EMI scheme, and what risks to look out for along the way. Before getting started we recommend you first of all check and confirm your company’s eligibility for an EMI. If you do not meet the criteria to qualify for any condition, then the tax benefits can be restricted. Have a look at our guide.
1. Define your goals
While almost all companies expect to improve staff retention and recruitment using an EMI you should think carefully about what specifically you are looking to achieve.
If you want certain employees to focus on financial performance while retaining your broad-based hard-working employees, for example, you may consider combining performance-based vesting with time-based vesting for receiving the award (See examples in point 4).
Before starting make sure you know how you are you going to measure these results.
2. Who should participate?
An EMI scheme allows an employer the freedom to decide which employees are to be included. Are you going to make it available to senior staff only, or potentially to all employees? You’re likely to include your skilled broad-based staff if you want to retain them and avoid them being poached by your competitors.
Prior to making this decision however you should ensure to check the qualifying conditions for your employees to ensure your participants are eligible to receive the maximum tax benefits without restrictions.
The goals set in point 1 can help you to make informed decisions here.
3. Types of EMI options
Generally EMI options can be exercised based or exit-only.
I) Exercise-based options
Here the EMI options aren’t immediately made available to the employees at the grant. Employees need to satisfy the vesting conditions, either time-based and/or performance based, before they earn their awards. Once they’ve been met, their options then become exercisable.
If you choose to offer exercise-based options you can read more about how to set up vesting rules in the following section.
II) Exit-only options
As the name suggests employees will only receive their shares in the company after an exit, this can include an IPO, the sale of your company to another and/or an M&A, depending on what your goals are.
You can also choose to combine vesting conditions in this case, meaning employees can only earn their awards after meeting both the vesting conditions and an exit.
4. Vesting
To echo the previous point, vesting determines when and how participating employees earn their EMI options. It could be time-based and/or performance based depending on the vesting conditions. Once these conditions have been met, the participants can exercise their granted EMI options, which means buying them to convert them into real shares.
The ideal vesting design for your company will depend on what you want to achieve, e.g. retention and/or performance. Is one more important than the other or do you require elements of both? Again this goes back to point 1 where you defined your goals. It’s important to note that you don’t have to use the same offering for everyone and can use different vesting approaches to reward a variety of employee groups.
I) Time-based vesting
With time-based vesting, employees can earn their options over time. This can be set at monthly, quarterly or annually. Given that the options vest annually over four years, for employees this can be like receiving a yearly service award and can aid staff retention. Choosing this option your vesting schedule will look like this:
| Years of Service | EMI options vested % (Cumulative amount) |
| Year 1 | 25% |
| Year 2 | 50% |
| Year 3 | 75% |
| Year 4 | 100% |
II) Time-based vesting with a cliff
If your options are subject to time-based vesting with a cliff, it means no options can start to vest until the amount of time (i.e. cliff) passes. This also means that an employee will get nothing for the period if they leave before the full year, making it an ideal way to encourage staff to stick around longer. The following is a common example of cliff-vesting practice:
| Years of Service | EMI options vested % (Cumulative amount) |
| Year 1 | 0% |
| Year 2 | 25% |
| Year 3 | 50% |
| Year 4 | 75% |
| Year 5 | 100% |
III) Performance-based vesting
Alternatively, EMI options can vest based on an employee’s performance targets, such as revenue generated. This goal could be tied with your Head of Sales’ EMI scheme for example, as a way to motivate them to achieve the financial goal since the higher target they hit, the more options they earn.
| Target | EMI options vested (%) |
| £1.5 million | 50% |
| £1.75 million | 75% |
| £2 million | 100% |
5. Exercise price
Next, you should consider the cost of an EMI option at the point of exercise. While the exercise price can potentially be set at any level (even nil price), it’s usually set at a price equal to the market value at the time of grant.
In this way, income tax or national insurance contributions (NICs) won’t incur on exercise. But, don’t forget to agree on the exercise price you are offering with HMRC to give your participants certainty about the tax benefits they’ll receive when they exercise their options.
6. Size of employee option pool
An option pool is an approved allocation of your company’s equity reserved for employees. A part of your EMI design process will be to consider what percentage of your total equity you want to set aside for your option pool.
Founders or company directors will usually base this decision on the number of employees and investors, how many shares they’re willing to give up, investors’ views, hiring needs, the talent market’s competitiveness, likelihood to issue more options in the near future, the impact of ownership dilution, or a range of other items specific to the company. Generally speaking, a typical sized employee option pool would be somewhere between 5% and 15%.
7. Number of shares being granted
Once you’ve decided the size of your option pool, you can then start to determine how many shares to assign to individual employees. Like the option pool, the number of shares being granted will depend on a few things:
1. Founders: Are you the sole founder? If there are more co-founders? How will issuing equity dilute the ownership of the company?
2. Investors: Consider how employee equity will dilute your current investors’ shares and keep in mind any possible concerns your future investors may raise as a result.
3. Employee grades: You may choose to give more equity to senior staff since they may be more likely to impact company growth than junior staff. Don’t forget only EMI options worth not more than £250,000 in shares per individual will qualify for EMI treatments.
8. Termination rules
If the employee leaves, can they keep the vested options and exercise them or will they lose everything? Will the treatment vary from situation to situation (i.e. good leavers vs bad leavers)? When designing your scheme, you should spell out how good and bad leavers’ options are treated in the EMI agreement.
Where there are good and bad leaver provisions, good leavers will typically be allowed to keep and exercise, whereas bad leavers will generally lose their EMI option and the reward entirely.
Enterprise Management Incentives Schemes, Simplified
J.P. Morgan Workplace Solutions has all the necessary skills, technologies and know-how to help manage your EMI option scheme effectively. So, you and your team can focus on your growing business and enjoy the benefits brought by the scheme.
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