Practical EMI Scheme Setup Guide for UK Startups: Eligibility, Valuation, Documentation, Deadlines

Understanding the EMI Scheme: Your Startup’s Secret Weapon

Attracting top-tier talent as a pre-seed or Series A startup is a constant battle against larger, cash-rich competitors. You cannot win on salary alone. For UK startups, the Enterprise Management Incentive (EMI) scheme is the single most powerful tool for levelling the playing field. It allows you to offer key employees a meaningful stake in the company’s future success in a uniquely tax-efficient way.

Setting up an EMI scheme transforms a job offer from a simple salary into a proposition of shared ownership and ambition. However, navigating the rules, from eligibility to HMRC compliance, can feel daunting for founders without a dedicated finance team. This guide provides a practical, step-by-step walkthrough of how to set up an EMI scheme for UK startups, ensuring you get it right from the start.

Is an EMI Scheme Right for Your Business Right Now?

An Enterprise Management Incentive (EMI) scheme is a UK government-approved employee share option plan designed specifically for smaller, high-growth companies. It allows you to grant options, which represent the right to buy company shares at a pre-agreed price at a future date. This distinction is crucial; employees receive the opportunity to buy shares, not the shares themselves, aligning their reward with the future growth they help create.

The Unbeatable Tax Advantage

The primary driver for the scheme’s popularity is the significant tax advantage it offers employees. When an employee exercises their EMI options and later sells their shares, the growth in value is typically subject to Capital Gains Tax. The key tax benefit for employees can mean paying 10% Capital Gains Tax instead of 40%+ income tax and National Insurance on the growth in value of their shares. This creates a powerful incentive that cash bonuses cannot replicate, directly linking an employee’s financial reward to the long-term success of the business.

A Strategic Tool for Growth

For your startup, an EMI scheme is more than a perk; it is a strategic tool. It helps you attract senior hires you might not otherwise be able to afford, retain your most valuable team members by giving them a reason to stay for the long haul, and align the entire organisation around the shared goal of increasing company value. If you are actively hiring, concerned about retaining key technical or commercial talent, and planning for a future exit, now is the perfect time to consider an EMI scheme. It signals to your team and to future investors that you are building a serious, well-structured company.

Step 1: Confirm Your Eligibility (The Non-Negotiables)

Before you dive into valuations and legal documents, you must confirm that both your company and your employees meet the strict EMI scheme eligibility criteria set by HMRC. Getting this wrong will invalidate the tax advantages, creating future problems for you and your team. Think of this as a non-negotiable checklist.

Company Eligibility Criteria

For your company to qualify, it must meet several conditions. These are designed to ensure the scheme benefits genuine trading companies with growth potential.

• Gross Assets: Your “Company Gross Assets must be under £30 million” at the time of the grant. This is tested based on your balance sheet.
• Employee Count: The “Company must have fewer than 250 full-time equivalent employees.” This focuses the scheme on smaller and medium-sized enterprises.
• Trade Restrictions: Your business must not operate in certain excluded sectors. The list of “Excluded trades include banking, legal services, and property development,” along with farming, shipbuilding, and coal and steel production. The activities must be conducted on a commercial basis with a view to realising gains.
• Independence: Your company must not be a 51% subsidiary of another company, nor be under the control of another company.

Employee Eligibility Criteria

For your employees to be eligible to receive EMI options, they must also meet specific requirements. These rules ensure the incentive is targeted at dedicated team members.

• Working Time Commitment: “Employees must work at least 25 hours a week or 75% of their working time for the company.” This means EMI is generally for core team members, not casual contractors or most non-executive directors.
• Material Interest Rule: “Employees cannot have a ‘material interest’ (own or control more than 30%) in the company” before the options are granted. This rule, which also extends to their associates, ensures the scheme benefits employees rather than existing major shareholders.

Step 2: Get Your HMRC Share Valuation Right

The most critical and often most intimidating part of setting up EMI options is the share valuation. This process involves determining a share price for your company that you can defend to HMRC. A valuation that is too high makes the options unattractive, while one that is too low risks being rejected by HMRC, jeopardising the scheme’s tax-advantaged status.

Understanding AMV and UMV

At the heart of an EMI valuation are two key concepts: Actual Market Value (AMV) and Unrestricted Market Value (UMV). Understanding the difference is vital.

• Actual Market Value (AMV): This is the value of the shares considering all restrictions placed on them. For a private startup, these typically include restrictions on transferring shares, drag-along rights, and the lack of a public market. These factors reduce the value of the shares.
• Unrestricted Market Value (UMV): This is the theoretical value of the shares if those restrictions did not exist.

For EMI purposes, the exercise price of the option must be set at or above the AMV at the date of grant to ensure employees receive the full tax benefits. The goal for most startups is to agree on a low but defensible AMV.

Common Valuation Methods for Startups

For early-stage startups, particularly those in the pre-revenue deeptech or biotech space, valuation can seem abstract. The two most common methods are:

1. Net Asset Basis: This is often suitable for very early, pre-revenue companies. You value the company based on the net assets on its balance sheet. Consider a biotech startup that has raised a small pre-seed round. Its balance sheet, managed in Xero, shows £400,000 in cash and £75,000 in specialised lab equipment, with £25,000 in liabilities. The net asset value is £450,000. Dividing this by the total number of shares gives a low but defensible AMV.
2. Recent Funding Round: If your company has recently raised capital from external, sophisticated investors, the price per share set in that round is a strong indicator of market value. HMRC often accepts this as a starting point for the UMV, from which a discount can be applied to arrive at the AMV, reflecting the illiquidity and minority status of employee shares.

The HMRC Approval Process

The reality for most pre-seed to Series B startups is more pragmatic: the goal is to agree on a defensible and realistic figure with HMRC. You formalise this by submitting your valuation analysis and supporting documents on form VAL231. Once HMRC formally agrees to your valuation, “An agreed-upon valuation from HMRC is valid for 120 days.” Within this window, you must grant the options to lock in that valuation with certainty. While it is possible to do this yourself, many founders use an accountant or specialist advisor to ensure the valuation is robust and to handle the submission process.

Step 3: Design the Rules of Your EMI Scheme

Once your valuation is agreed, you need to design the rules of your EMI scheme. This involves defining the option pool and setting the terms that will govern how employees earn and exercise their options. These rules form the foundation of your employee equity plan and should be decided carefully.

Establish Your Option Pool

First, you must establish an option pool, which is a block of shares reserved for issuance to employees. A “common option pool size for early-stage companies is 10-15% of company equity.” This pool is typically created by authorising new shares, which dilutes existing founders and investors. This dilution is a necessary investment to attract and retain the talent needed to grow the overall value of the company.

Understand the Generous Grant Limits

The scheme has generous limits on the value of options that can be granted. These limits apply at the time of the grant, based on the UMV you agreed with HMRC.

• Company Limit: “A company can grant a total of up to £3 million worth of EMI options.”
• Individual Limit: “An individual employee can receive up to £250,000 worth of options (valued at grant) over a 3-year period.”

Define Key Terms in Your Scheme Rules

The specific terms of your scheme will be documented in your scheme rules. The most critical elements to define are:

• Vesting Schedule: This dictates how employees earn their options over time. By far, “the most common vesting structure is a 4-year period with a 1-year ‘cliff’.” This means an employee earns no options for their first 12 months. On their first anniversary, 25% of their options vest. The remainder typically vest monthly or quarterly over the following three years, ensuring alignment over a significant period.
• Exercise Price: This is the price per share an employee will pay to acquire the shares when they exercise their vested options. This price is fixed on the date the options are granted, based on your HMRC-agreed AMV.
• Leaver Provisions: These rules determine what happens to an employee’s options if they leave the company. It is critical to distinguish between a ‘Good Leaver’ (e.g., someone leaving due to redundancy, retirement, or illness) and a ‘Bad Leaver’ (e.g., someone dismissed for gross misconduct or who resigns to join a competitor). A scenario we repeatedly see is ambiguity here causing disputes. For a SaaS startup, a 'Good Leaver' might be an employee made redundant who gets to keep their vested options and exercise them within a 90-day window, while a 'Bad Leaver' who joins a direct competitor might forfeit everything, vested or not. Customising these definitions in your scheme rules prevents future headaches.

Step 4: Formalise Documentation and Notify HMRC

With the valuation agreed and the scheme rules designed, the final step is to formalise everything through legal documentation and notify HMRC. Neglecting this administrative stage can undo all your hard work and invalidate the scheme’s tax benefits.

Essential Legal Documents

Three core legal documents are required to properly implement your EMI scheme:

1. Scheme Rules: This master document governs the entire EMI scheme. It outlines all the terms, including vesting, exercise conditions, leaver provisions, and what happens in a change of control scenario.
2. Option Agreement: This is the individual contract between the company and each employee. It details their specific grant, including the number of options, the exercise price, and the grant date. It legally binds the employee to the overarching scheme rules.
3. Board Resolution: Your company’s board of directors must pass a formal resolution to adopt the EMI scheme and approve the granting of options to specific employees. This should be properly minuted.

The Critical 92-Day Notification Deadline

Once the options have been granted, you enter a strict compliance window. This is the most common point of failure for busy founders. “HMRC must be notified of any new EMI option grant within 92 days from the date of the grant.” This is a non-negotiable deadline. Missing it will result in the loss of all tax advantages for that specific option grant, converting a tax-efficient incentive into a significant tax liability for the employee.

The Notification is done online via HMRC’s ERS (Employment-Related Securities) service. You will need to register for this service in advance, a process which can take a couple of weeks, so do not leave it until the last minute. Set a calendar reminder the day you grant the options.

Maintain Your Cap Table

Finally, managing your capitalisation table accurately becomes paramount once you introduce options. While a spreadsheet might suffice initially, an EMI scheme adds complexity with multiple grants, vesting schedules, and potential leaver scenarios. Using a platform like Capdesk, Ledgy, or Carta is highly recommended to track your option pool, vesting progress, and overall ownership structure without costly errors.

Practical Takeaways and Your Next Steps

Successfully setting up an EMI scheme boils down to a methodical process. It is a powerful mechanism for growth, but it demands careful planning and attention to detail. The key is to be systematic and aware of the critical deadlines.

Key Takeaways

• Eligibility is binary. Confirm your company and employees qualify before you invest any more time. This is a simple but essential first gate.
• The valuation is your biggest risk. A poorly justified valuation can be rejected or unravel years later. Invest the necessary time and resources to get a defensible figure agreed with HMRC.
• Stick to standard terms. A 4-year vesting period with a 1-year cliff is an industry standard for a reason. It is understood by employees and investors alike and balances company and employee interests fairly.
• Do not miss the 92-day deadline. The HMRC notification requirement is absolute. Missing it means your employees lose their tax benefits. Set calendar reminders immediately after granting options.

Your Action Plan

1. Model the dilution. Before creating an option pool, use a simple spreadsheet to model the impact of a 10% or 15% pool on the founders’ and any existing investors’ equity. See our guidance on how to model dilution.
2. Prepare for valuation. Collate your latest financial statements from your accounting software, your articles of association, and any details of recent investment rounds.
3. Decide on professional help. Honestly assess whether you have the expertise and time to handle the valuation and legal documents internally or if you should engage an accountant or a law firm specialising in share schemes.
4. Register for ERS. Proactively register for HMRC’s Employment-Related Securities online service now so you are ready to notify them as soon as you grant your first options.

For more detailed guidance on scheme design, see the hub for Share Option Schemes.

Frequently Asked Questions

Q: Can we grant EMI options to contractors or advisors?
A: Generally, no. EMI options are restricted to employees who meet the working time requirements (at least 25 hours per week or 75% of their working time). Non-executive directors, consultants, and freelance contractors are typically ineligible. Other forms of equity awards can be considered for these individuals.

Q: What happens to EMI options if the company is acquired?
A: Your scheme rules will define this, but typically an acquisition is a trigger event. This often causes all or part of an employee's options to accelerate and vest immediately, allowing them to exercise their options and sell the shares as part of the sale transaction, benefiting from the exit.

Q: Do we need a lawyer to set up an EMI scheme?
A: While not legally mandatory, it is highly advisable. The valuation process requires careful justification to HMRC, and the legal documents (scheme rules, option agreements) must be watertight to be effective. Using a specialist advisor or platform can prevent costly mistakes that invalidate the scheme's tax benefits.

Q: How often should we refresh our EMI valuation?
A: An HMRC-agreed valuation is valid for 120 days. If you plan to grant more options after this window, or if a significant event occurs (like a new funding round), you will need to submit a new valuation to HMRC to ensure any new grants are made at an approved market value.