Preparing UK share option documentation for exit events and acquisition due diligence

Understanding UK Share Option Documentation for an Exit

For a founder, the prospect of an exit is the culmination of years of hard work. As that moment approaches, the focus shifts to due diligence, where every past decision comes under a microscope. It is often during this high-stakes period that the administrative details of an employee share option scheme, particularly a UK EMI scheme, move from a background task to a critical deal-level issue. Getting your employee equity documentation right from the start is not just good governance; it is a core part of de-risking your company’s acquisition and ensuring a smooth EMI share options exit process in the UK. A disorganised or non-compliant scheme can introduce delays, create unexpected tax liabilities, and erode value at the final hurdle.

What 'Exit-Ready' Documentation Actually Means

‘Exit-ready’ documentation means more than having a collection of signed agreements. It signifies a complete, consistent, and verifiable record of every share option ever granted. What buyers and their lawyers look for is certainty. They need to understand precisely who owns what, under what conditions, and whether the tax-advantaged status of those options is secure. This confidence is built on a single source of truth for all your equity records.

For every single option grant, this requires four core documents to be in place and perfectly aligned:

1. Board Minute: This is the official written record of the board of directors approving the option grant. It must detail the recipient's name, the number of shares under option, the exercise price, the vesting schedule, and the specific option scheme (e.g., EMI) under which the grant is made.
2. Signed Option Agreement: This is the legal contract between the company and the employee. It outlines all terms and conditions, including vesting, leaver provisions, and what happens in a change of control scenario. It must be signed and dated by both parties.
3. HMRC Notification: This is the proof that the grant was registered with HMRC within the statutory deadline to qualify for EMI tax relief. This typically involves a copy of the online submission and the confirmation receipt from HMRC.
4. Updated Option Register: This is the master ledger, separate from your cap table, that tracks all option grants. It should include the grant date, holder's name, number of options, vesting details, exercise price, and the status (e.g., outstanding, exercised, lapsed).

When these four elements are perfectly synchronised for every grant, you have the foundation of an exit-ready scheme. Any discrepancy becomes a problem to be solved during due diligence.

Tripwire #1: The Ticking Clock on Your HMRC Valuation

One of the most common questions from founders is: "My EMI valuation was approved by HMRC. Am I set?" The answer is only for a limited time and under specific conditions. Securing a valuation agreement with HMRC on form VAL231 is a crucial first step in the HMRC share valuation process for granting tax-advantaged Enterprise Management Incentive (EMI) options, but it comes with a strict shelf life.

The 120-Day Validity Window

A key fact to remember is that an agreed HMRC valuation (form VAL231) for EMI options is generally valid for 120 days from the date of the agreement. (Updated from 90 days as of 6 April 2023). Any options must be granted within this window to rely on that valuation. The ticking clock starts the day HMRC agrees, not the day you submitted your paperwork. A scenario we repeatedly see is a startup securing a valuation but delaying grants for several months, only to find the 120-day window has closed, rendering the valuation useless for future grants.

The Impact of Significant Events

A foundational rule is that significant events (e.g., new funding round, major contract) can invalidate an HMRC valuation even within the 120-day window. This is not a theoretical risk. Consider a UK-based SaaS startup that receives its VAL231 approval. Sixty days later, they land a transformative multi-year contract with an enterprise client that significantly alters their revenue forecasts. Even though they are still within the 120-day period, this material event has likely invalidated their valuation. Granting further options based on the old, lower valuation could disqualify them from EMI tax relief, creating a significant problem that will be uncovered during an exit event share options review.

The Separate 92-Day Notification Deadline

Finally, the valuation is separate from the notification deadline. Once an option is granted, HMRC notification for an option grant must be filed within 92 days of the grant date. Missing this deadline will disqualify the grant from EMI status, regardless of how robust your valuation was. This administrative tripwire can easily catch out founder-led finance functions without dedicated support. For EMI scheme compliance, this deadline is absolute.

Tripwire #2: Disconnected Cap Table and Option Records

For most early-stage companies, the cap table lives on a spreadsheet, and grant agreements are saved in a shared drive. In the beginning, this is often sufficient. The reality for most pre-seed to Series A startups is that a well-maintained spreadsheet is a perfectly pragmatic solution. However, this system has a clear breaking point.

When Spreadsheets Become a Liability

The critical distinction is the operational trigger point when spreadsheets become inadequate for cap table management. This typically occurs around the 10-15 employee mark, after a priced funding round, or when you start having more complex leaver scenarios. At this stage, the risk of human error, version control issues, and inconsistencies between the spreadsheet, board minutes, and legal agreements grows exponentially. The pain of incomplete or inconsistent records is that they create cap table uncertainty that can delay or devalue a transaction.

During due diligence, a buyer’s legal team will meticulously cross-reference your cap table with every board minute approving grants and every signed option agreement. If the number of options in the spreadsheet for 'Jane Doe' does not match the board minute, or if the vesting schedule differs from the signed agreement, they will flag it. Each discrepancy requires time to investigate, explain, and rectify, burning through expensive legal hours on both sides. The practical consequence tends to be a loss of momentum and trust in the seller's data quality.

Adopting a Single Source of Truth

This is where cap table management software like Ledgy, Capdesk, or Carta becomes essential for managing equity for acquisition. These platforms are not just digital cap tables; they are systems of record designed to be the single source of truth. They link grants to board approvals, store signed documents, and manage the option register in one place. Adopting such a tool is not an admission of failure with spreadsheets; it is a strategic step in professionalising your employee equity documentation and preparing for a company sale.

Tripwire #3: Vague Agreements That Create Exit Ambiguity

Using a standard online template for your share option agreements UK can feel efficient, but it often leaves critical ambiguities that only surface during the intense pressure of an exit negotiation. The generic nature of these templates can fail to define key provisions with the clarity an acquirer demands, inviting legal disputes and costly renegotiations at the worst possible time.

Good Leaver vs. Bad Leaver Provisions

One of the most problematic areas is leaver provisions. The distinction between a 'good leaver' and a 'bad leaver' is crucial, determining what happens to an employee's vested and unvested options upon their departure. A template might simply state that a 'good leaver' can exercise their vested options, but it may not clearly define the circumstances that qualify someone as 'good' (e.g., redundancy, ill health) versus 'bad' (e.g., gross misconduct, joining a competitor). This ambiguity is a red flag for acquirers.

Consider an unresponsive ex-employee who left on neutral terms six months before an acquisition offer. The option agreement is vague on their leaver status. The buyer needs 100% certainty on the company's capital structure, but this ex-employee is now a loose end. Are their vested options exercisable or have they lapsed? The lack of clarity creates a last-minute scramble to negotiate with this individual, who now holds considerable leverage. This can hold up the entire deal.

'Change of Control' Clauses

Similarly, the 'change of control' clause itself needs to be precise. It must clearly state what happens to options during a sale. Does vesting accelerate for all option holders ('single trigger') or only if they are also terminated by the acquirer ('double trigger')? Are options to be 'rolled over' into the acquirer's stock or cashed out? If a buyer has to interpret vague language, they will assume the worst-case scenario for them, which can impact their valuation or even their interest in the deal.

A Practical Plan for Getting Your Documentation in Order

Moving from reactive clean-up to proactive management of your share option documentation is one of the most valuable steps you can take in preparing for a future exit. What founders find actually works is breaking the problem down into manageable steps that can be taken today.

1. Check Your Valuation's Pulse: Find your latest HMRC VAL231 agreement. Note the 120-day expiry date. Critically, list any significant events that have happened since its approval, such as a new funding round, a major client win, or a strategic pivot. If any exist, you likely need a new valuation before granting more EMI options.
2. Conduct a Four-Point Audit: For a sample of recent grants (we suggest at least five), pull the four essential documents: the board minute, the signed agreement, the proof of HMRC notification, and your option register or cap table. Do they all tell the same story? Check names, dates, and share counts meticulously. If not, you have identified a disconnect that needs to be fixed across your entire scheme.
3. Stress-Test Your Agreements: Read your standard option agreement through the eyes of a sceptical lawyer. Are the 'good leaver', 'bad leaver', and 'change of control' clauses completely unambiguous? If you can find a grey area, so can a due diligence team. A good test is to ask: could a reasonable person interpret this clause in more than one way?
4. Define Your Tooling Trigger: Acknowledge that spreadsheets have a shelf life. Have a discussion with your co-founders or board about the trigger point for migrating to a dedicated cap table management platform. This could be hitting 15 employees, closing your next funding round, or simply the desire to enforce better process discipline before your next audit.

Ultimately, managing equity for acquisition is about eliminating uncertainty. By treating your share option records with the same discipline as your financial accounts, you are not just ticking a compliance box; you are building a more valuable and acquirable company.

Frequently Asked Questions

Q: How often should we get a new HMRC valuation for EMI options?
A: You need a new valuation whenever you plan to grant EMI options and your previous valuation is over 120 days old, or if a significant event (like a new funding round or major commercial milestone) has occurred since your last valuation was agreed, even if it is within the 120-day window.

Q: Can we fix mistakes in our EMI documentation before an exit?
A: Yes, many issues can be rectified, but it is far better to be proactive. This might involve board resolutions to ratify past administrative errors or seeking professional advice to correct documentation. Addressing these issues well before a due diligence process begins demonstrates good governance and saves significant time and cost later on.

Q: What is the difference between an option register and a cap table?
A: A cap table lists who owns shares in the company right now (shareholders). An option register tracks the right to buy shares in the future (option holders). While related and often managed together in software, they are distinct records. A buyer's legal team will need to see both to verify your company's full capital structure.

Q: Does the EMI share options exit process in the UK differ for different types of sale?
A: Yes, the mechanics can differ. In a share sale, options are typically exercised immediately before the sale completes, allowing employees to sell their new shares to the acquirer. In an asset sale, the treatment can be more complex and depends heavily on the 'change of control' clause in the option agreement.