These are the criteria your scheme must meet when it is created in order to qualify as EMI.
Types of shares
Issued options need to be for fully paid shares. They must not be for redeemable shares, which have a fixed buy-back agreement from the company.
Options need to be realistically capable of being exercised within ten years of their grant.
Terms written down
The terms of the EMI agreement between your company and each of its employees need to be written down and kept on file in case HMRC wishes to inspect them.
The written terms must cover:
- The date of option grant.
- The number of shares granted.
- The exercise price.
- When and how the options can be exercised.
- Any restrictions on the shares, such as shares being subject to a drag-along clause.
- Any performance conditions, such as the employee meeting specific sales goals.
- Any forfeiture risk, such as the employee leaving the company.
Vestd automatically keeps a digital record of these terms that you can access at any time.
Options not transferable
The options must not be transferable, except in the case of the employee's death.
Amendments cannot be made to improve the rights of the options holder in terms of number of shares, price, or when they can be acquired, unless the impact is minimal, or was envisaged in the original agreement.
Performance conditions can only be changed if the conditions are fairer for the employee and not more difficult to achieve.
If your company is acquired post-scheme setup, there are a detailed set of conditions if you wish the scheme to be replaced within the new entity. These conditions can be found on this GOV.UK page.
For further information on creating a qualifying EMI share scheme, please visit the GOV.UK page on qualifying factors.
If you are confident that your business meets these qualifications, you will be able to create an EMI scheme. Your next step will be to obtain a valuation from HMRC so that your scheme and its recipients have certainty on the value of their shares and know what tax will be due on exercise or exit, as the actual value will change as your business grows.