The many ways employees can benefit from your EMI scheme

Last updated: 1 October 2024. 

One of the primary advantages of the Enterprise Management Incentive scheme is its flexibility.

While the majority of businesses opt for exit-only EMI options, where employees can only receive and sell their shares upon an exit event, that’s certainly not the only possibility.

In fact, there are several other ways employees can benefit from an EMI scheme. 

This guide overviews the flexibility of the EMI scheme and the many ways employees can benefit from it. But if you want to learn more about the scheme itself, see here or download our free guide.

Designing EMI schemes 

EMI schemes begin with an options grant, where the employee is granted the option to buy shares in the future at a price which is fixed in the present. 

EMI schemes are flexible, which allows businesses to tailor them to their short, mid and long-term goals and objectives. There are two broad methods of designing EMI schemes:

1. Exit-based options (sometimes called “exit-only options”)
2. Exercisable options (sometimes called “exercise-based options”)

Either method involves the same inner workings, such as vesting schedules (which are optional, though nearly always utilised).

When a business grants options to employees, they typically become available after certain milestones and conditions are met, called vesting.

Once options are vested through performance milestones or across fixed time periods, the employee can convert their options into real shares. That's what is known as exercising.

Whereas exit-only options are exercised at an exit event, at which point the employee can sell them as shares. 

This creates two distinct phases:

• Employees are firstly option holders, and after their options are exercised, they can become shareholders.
• What employees can do with their shares depends on whether the scheme is exit-based or exercise-based. 

Let’s take a closer look at the two options.

Exit-based options

Exit-based options are perhaps the simpler of the two. Here, employees are granted options that they can exercise upon an exit event, which means a majority change in control via:  

• A trade sale
• A management buy-out
• A merger with another company
• Partial or full floating on a public exchange
• Sale to an Employee Owned Trust

Tip: if an exit is on the cards for you, ensure you have a solid exit plan in place.

Exit-based options are popular among small businesses and startups, comprising around 62% of all EMI schemes set up with Vestd in 2021. 

Exit-based options can be combined with a vesting schedule too, which means options can be exercised only once a) the vesting schedule is complete and b) an exit event is triggered.

In essence, employees exercise their options and buy their shares when the exit event such as a sale is agreed, and proceed to sell their shares to the business buyer for capital gain, with the added tax advantages of the EMI scheme. 

Exit-based options are ideal for businesses aiming for fast-paced progress and growth towards an exit, in say, the next ten years.

There is some built-in flexibility, however, as exit-only options can be switched to exercisable options, so long as the terms of the agreement cover that.

Exercisable options

Exercisable options often have time-based vesting schedules or performance milestones, for either the business, the individual, or both.

There may also be a waiting period, or “cliff,” which determines when a team member is eligible to receive any options. 

Examples of vesting milestones include: 

• Annual Recurring Revenue (ARR) increasing
• Company valuation reaching a threshold(s)
• Customer acquisition goals
• Monthly Recurring Revenue (MRR) increasing 

Milestones should be clear, tangible and specific. Download our free guide for examples.

Exercisable options are suitable for businesses that don’t intend to sell in the short to medium term. 

Employees are incentivised to remain at the business until commercial goals are met by gradually vesting options over the short and mid-term.

Once options are converted into shares, new shareholders can benefit from their shares in the following ways: 

• Dividends: Once shareholders, employees can start receiving dividends (subject to directors paying dividends to their class of shares).
• Buybacks: The company itself could buy back the shares (subject to the rules around buybacks).
• Share transfer: Employees could sell their shares to another individual or company, transferring them to someone else in exchange for cash. 

EMI schemes are customisable

As we can see, EMI schemes are highly customisable. Let's recap:

• The type of options granted to employees via the EMI scheme can be either exit-based or exercise-based. Though exit-only options can be switched to exercisable, so long as that is covered by the terms of the agreement.
• You can also combine exit-based and exercise-based options by allowing employees to exercise vested options if an exit occurs before their options are fully vested.
• Both types of options can be combined with vesting schedules, which can be either performance or time-based.
• Performance-based vesting schedules apply to either the individual (e.g. making a certain amount of sales) or the business itself (e.g. achieving increased monthly recurring revenue).
• For exercise-based options, employees who remain at the business can benefit from dividends, buybacks and share transfers. 

Take the necessary time to consider how you’ll structure and run your EMI scheme.

Depending on your commercial goals, you can tailor your EMI scheme to incentivise rapid growth for a quick exit, or build a long-term business that you don’t intend to sell.

It’s not just businesses that benefit from this flexibility, but employees too.

Some employees will relish the challenge of working towards a valuable quick exit, whereas others will be attracted to the opportunity of holding shares and receiving dividends.

So, the options are there - it’s down to you to take advantage of them!

Harness the flexibility of EMI to your advantage

The immense flexibility of EMI schemes enhances their many other benefits.

Distributing equity via an EMI scheme provides a tax-advantageous way to incentivise employees and fuel growth, which is why we created an end-to-end EMI management platform to take the groundwork out of building one yourself.

While the inner workings of EMI schemes may seem a little confusing or intimidating, Vestd makes them far simpler to set up and manage.

We help hundreds of customers create EMI schemes every year, and will work with you to establish an effective scheme structure, vesting schedule, etc.

So if you’re feeling a bit lost in the dark - don’t worry - we’ll show you the light!

Schedule a call, and we’ll answer your questions.