The hidden costs of EMI and the secret no one’s telling you about your company share scheme

We talk to a lot of business owners about their share schemes at Vestd. 100+ each month. And there is a surprising misconception that often comes up when they’re calculating the costs of their share scheme. The challenge is they are usually focused on the price of the option agreement document. What many don’t appreciate is the secret they are often not told:

It’s estimated that almost 50% of EMI share schemes aren’t compliant when it comes to exit.

So whats going on?

The document isn’t the whole story. The problems stem from a combination of too many cooks + human error; things like calculation mistakes made by incorrect formulas in spreadsheets and vesting schedules, admin not being completed correctly or not on time, valuation inaccuracies, missed submissions, incorrect clauses buried deep in legal docs and a host of other things.

That’s why so many people overpay in professional fees and tax unnecessarily.

Why is this such a problem?

The whole reason you are investing in an EMI scheme is to give your employees a tax efficient way to participate in sharing ownership in the company. And you want the company to benefit from that alignment in interests. Luke, the CEO of ThanksBox sums it up nicely:

“It feels natural that our people are invested in our success. The founders are passionate about people being invested in the company to change the way they think and act — as a shareholder, not simply an employee.”

If your scheme isn’t compliant when employees come to see that value there is going to be a huge gap between what was promised and what they’ll actually receive. We see huge amounts of money being spent trying to retrofit mistakes that were made years earlier because shortcuts were taken or things simply fell through the net as no single person owned the scheme management (or understood what was involved).

This broken flow is due to many owners.

The agreement document is traditionally generated by your lawyer. The valuation by your accountant. The submissions to HMRC by the CEO or CFO. And then you have to decide, who is going to pick up the annual notifications, updates to HMRC, keeping an accurate record of what’s been issued and what’s left in the pool, share authorisation, board resolutions and approvals, ensuring new people are added correctly and people that leave are cancelled compliantly. Vesting schedules, exercising, updating Companies House, the list goes on.

The truth is, coordinating all this tends to all sit on the CEO/CFOs shoulders and most don’t appreciate what’s involved until after they get started. They believed the price they paid for the doc included all this. Unfortunately, it doesn’t. And of course they are busy, dealing with the demands of the business so they end up constantly forking out cash in professional fees to plug these gaps over the life time of the scheme. The cost of that initial doc actually becomes quite irrelevant when you consider the life time costs of a scheme which we often see racking up into the tens of thousands of pounds when all’s considered (not to mention their valuable time spent coordinating it all). Scouring the internet for the cheapest EMI template is incredibly short sighted (it’s why at Vestd, we provide the doc for free to customers, it’s really not where the value is when the aim is to exit with a compliant scheme and happy employees).

You can see the headache this creates for CEOs/CFOs, especially when a business owner might only do this once in a 5-10 year period. Trying to learn all the ins and outs, the ever changing policies and criteria becomes at worst unrealistic and at best simply inefficient. With responsibility spread over complex tasks, multiple people, paper documents and Excel/Google docs its understandable to see why things can slip and errors are made.

Managing a share scheme is so much more than the option agreement.

Imagine if you had what no one’s been sharing with you. A full list of all the things you’ll need to consider for the lifetime of your scheme. So you can fully appreciate what’s involved, protect your business, your employees and stay compliant through the journey. So you can feel fully informed when you speak to your professional service advisor and can understand where they have you covered and where there are gaps. And most of all so you can get a realistic estimate on the total costs involved to see the scheme through to exit.

My intention is that by providing the below checklist, you’re less likely to be misled by someone only interested in selling you the agreement document. Or an over priced valuation. Or an excel template. You get the picture…

Your (complete) Share Scheme Checklist

I hope that’s been helpful. You can also download a pdf of the checklist here.

If you’d like to understand how you can set up your share scheme and eliminate all the workload above, whilst reducing your costs significantly, simply drop us a line to hello@vestd.com. Our team of share scheme specialists would be happy to give you a no pressure demo of Vestd and explain how we use software to save you the headache and keep you compliant.

What’s Vestd?

Vestd is the UK’s share scheme specialist. We are authorised and regulated by the FCA and every week, our experts, help more companies set up their EMI option schemes than anyone else.