What is a VAL231 form and why do I need one?
Last updated: 19 April 2024 If you're reading this, you're probably familiar with Enterprise Management Incentives (EMIs). But just in case this is...
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Last updated: 20 March 2025 by Tacita Bugnath.
There are plenty of reasons why founders need to value their business, and in each case, the goal might be different. If you’re fundraising, you want a high valuation to reflect your company’s growth and potential.
But when it comes to setting up an Enterprise Management Incentive (EMI) scheme for your team? A high valuation might not be what you’re looking for at all!
In fact, a lower valuation can be a major advantage when granting share options. This might sound counterintuitive, but in this blog, we’ll explain why - and why it’s not something to worry about.
When founders hear “low valuation,” alarm bells can go off. But let’s clear up a common misconception:
A low valuation for EMI does not mean your business is worth less in the eyes of investors.
The valuation used for investment rounds is based on your company’s future potential. An EMI valuation, however, is focused on the present - how the business stands right now. And that’s a big distinction.
Let's get into it.
Unlike publicly traded shares, EMI options aren’t immediately sellable. Even when they’re exercised, there’s often no active market for them. Because of this illiquidity, HMRC allows a lower valuation than what investors might pay in a funding round.
EMI options don’t typically carry voting rights (or if they do, they have little influence due to small ownership percentages).
If the EMI options are “exit only,” recipients don’t become shareholders until right before a sale - meaning they never get to use voting rights at all. This reduces their immediate value.
HMRC use this term to refer to the idea that not all EMI option holders will stay at the company long enough to exercise their options.
Since there’s a real risk that some will lose their rights before they can cash in, HMRC factors this into the valuation. i.e. not becoming a shareholder and losing/forfeiting their options.
Investors look to the future when valuing a company. They consider projected revenue, growth plans, and market conditions. EMI valuations, however, focus on the company’s present-day financials, which often results in a lower number.
Investors in early-stage companies often benefit from tax reliefs like EIS and SEIS, which help offset potential losses.
EMI option holders, however, don’t get those benefits - the money they pay to exercise their options is fully at risk in the sense they can't claim any of it back. This adds to the justification for a lower valuation.
The share class used for investment rounds is not always the same as the one used for EMI option grants, which means direct comparisons between the two can be misleading.
Options issued under an EMI scheme are typically granted over ordinary shares, which generally do not carry the same preferential rights as preferred shares - the type commonly issued to investors.
Unlike preferred shares, EMI options typically do not provide priority access to dividends or capital distributions, making them less valuable in certain scenarios.
Here’s what that means in practice:
They may not carry voting rights, limiting the holder’s influence over company decisions. Even if they do, EMI holders are usually minority shareholders with no meaningful control, so they are not valued as such.
They are ranked lower in the capital structure, meaning EMI option holders are among the last to receive proceeds in the event of a company sale or liquidation.
These factors contribute to why EMI valuations are lower than investment valuations, reinforcing the tax efficiency of the scheme while ensuring compliance with HMRC guidelines.
When setting up an EMI scheme, HMRC approves two key valuation figures, and you set the third. Here’s what they mean:
This is the price an employee pays to buy their shares when they exercise their options. While it must be at least the nominal value (usually under £1), you have flexibility in setting it.
The UMV is the theoretical value of shares if there were no restrictions on selling them. It’s typically lower than the price investors pay in funding rounds because it reflects factors like illiquidity and lack of voting rights.
The AMV is usually up to 30% lower than the UMV, accounting for restrictions and risks like forfeiture. This number is critical because if the exercise price is below the AMV, employees will owe income tax on the difference.
Setting the exercise price at or above AMV ensures tax efficiency.
A lower EMI valuation directly benefits your employees. Here’s why:
If you’re setting up an EMI scheme, a lower valuation is not a red flag - it’s a smart financial move that helps your employees make the most of their options. It ensures they can afford to buy in, reduces tax liabilities, and maximises their potential upside in the long run.
Navigating EMI valuations can be tricky, but that’s where we come in. If you’d like to explore how we can help you get the most out of your EMI scheme, book a free discovery call with one of our equity specialists today.
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