EMI Schemes | Notion

Compliance, Impact on companies, Impact on individuals

The Basics

What

Enterprise Management Incentives are a government backed share reward scheme designed to provide a tax efficient way to reward employees working in small companies. Companies are able to grant employees shares and defer the tax payable on these shares as remuneration to a later date under the scheme. When properly managed and set up, employees will only pay Capital Gains Tax on the gain in value of their shares. As this is usually charged at a lower rate than employment taxes, this can generate significant tax savings for the Employee.

Why

For smaller companies, cashflow can often by a problem when recruiting more senior staff to join the team. In order to avoid paying a premium salary that the company may not be able to afford, SME’s may want to offer senior management equity as an incentive for them to work for them. If the company does well and is acquired, this may generate a greater reward for management than a higher salary would have done at a larger company.

How

Sounds great! - How soon can I set up the scheme?It will take a bit of time to set up the scheme, and legal fees are likely to be incurred in drafting the EMI contractPlatforms like Vested, Seedlegals, Ledgy, and Carta/Capdesk can be used to simplify the management of the process, and have ready to use templates that can be beneficial in the set upHowever, if the company has a number of different shareholders, it is likely that approval will be needed from all of them in order to set the limits for the scheme

How to design the scheme

The best way to set up a scheme - get a (good) lawyer to write it for you!

A key point to make your partners aware of when they are thinking of setting up the scheme is that in order for a company to qualify for the EMI scheme, all share classes must participate at each stage of a distribution of capital

What this means in practicality is that if investment has previously been received and there is a liquidation preference for the investors (i.e. they get their money back before anyone else) this will need to be re-written.

E.g.

Name	No. Shares	Capital Rights pre EMI	No. Shares post EMI	Capital Rights post EMI
Share Class 1	50	Priority 1 - return 100% of initial invested share value + share premium. No participation in remaining return of capital	50	Priority 1 - return 99.99% of initial invested share value + share premium. Participate at 0.01% of the remaining distribution of funds
Share Class 2	20	Priority 2 - Equal rights in distribution of assets after Shareholder 1 in the ratio of remaining share classes	20	Participate in 0.01% of share class 1 return of funds, then 99.99% of remaining distribution of funds in the ratio of remaining share classes
Share Class 3	30	Priority 2 - Equal rights in distribution of assets after Shareholder 1 in the ratio of remaining share classes	30	Participate in 0.01% of share class 1 return of funds, then 99.99% of remaining distribution of funds in the ratio of remaining share classes
Options to be granted over share class 2	0		20	Participate in 0.01% of share class 1 return of funds, then 99.99% of remaining distribution of funds in the ratio of remaining share classes

Example of the above in a return of capital allocation: