How to Design an EMI Scheme
The Enterprise Management Incentive (EMI) scheme is very popular among the UK start-up community, and rightly so. It gives growing businesses the opportunity to attract (and retain) top talent by awarding equity compensation with significant tax benefits.
For share plan administrators in these companies, the EMI hits all the right notes for what they want from an incentive plan; if they design their plan correctly (and tick all the right boxes).
Today, we’re going to look at a checklist of what you should be including in your EMI scheme, and what risks to look out for. For a comprehensive look at what an EMI scheme is, click here.
Checklist for designing an Enterprise Management Incentive (EMI) scheme
- Check your Articles of Association
Before tackling the external laws, you need to check if your own internal rules allow you to implement an EMI scheme. By examining your Articles of Association, you can find whether you need board or shareholder approval to set up the plan, what type of shares have been issued already, and whether special classes of shares will need to be created.
- Make sure you’re eligible for an EMI
The EMI has several criteria every company must meet (you can find them in detail here). Essentially, the EMI is aimed at smaller, growing companies in the UK. The big items are the company mustn’t have assets of more than £30 million, be independent, have more than 250 employees and can’t work in certain ‘excluded’ industries.
- Make sure you’re eligible each year
This is worth flagging separately. It is very easy to roll over an employee incentive plan from year to year, offering it to new employees as they enter the building. However, if your company breaks one of the criteria (for example, if you’ve taken over or if your assets grow over the limit) then the scheme may be ineligible for anyone that joined after that condition was broken. The result of this will be HMRC removing any tax benefits for your employees, significantly reducing their rewards.
- Decide on the types of shares being offered
Deciding on the type of shares being offered is where you need to bring in some long-term thinking. Do you want to offer ordinary shares, or non-voting shares, preference shares etc. In essence, there are a huge variety of options here (and individual companies can create share ‘classes’ within these options) and it’s up to the company to decide what they want to offer.
The considerations should include whether these shares have voting rights if they have entitlement to any dividends, or are eligible for any additional capital when the business is sold.
- Decide who is getting the awards, and how
A crucial part of any plan is to decide which level of employees will be rewarded. This can be very different depending on the circumstances. If your company is made up of a small number of high-value individuals, they may all be part of the EMI, whereas if there are obvious tiers for your talent, it may be offered to those ones most valuable to keep.
Beyond what employees are getting them, you’ll also have to decide how they will receive their awards. Will it be through meeting performance targets, length of service, or on sale of the company? These all must be clearly defined.
- Make your ‘good leaver’ and ‘bad leaver’ rules
Always a fundamental part of any incentive plan design, having clear good and bad leaver rules protects you against people leaving the company while part of the scheme.
If an employee leaves the company voluntarily or on good terms, they are known as a ‘good leaver’. It’s important to have what they are entitled to in black and white in the signed contract so there is no dispute or any obstacles. For example, part of a good leaver agreement may be to transfer back the shares and be paid in the cash value of those shares instead. If that is not contractually binding, the leaver may decide to hold onto the shares if they are of greater value and there’d be nothing legally you could do to stop them.
On the other side, a ‘bad leaver’ is what it sounds like – someone that leaves the company on bad terms. The same things apply here to good leaver clauses; they have to be clear and in black and white.
- Notify the HMRC and agree the market value of the shares with them
The HMRC, although it doesn’t approve each scheme, plays a crucial role in EMIs. Firstly, you should agree on the market value of the shares with HMRC in advance so you can give your participants certainty about the tax treatment they’ll receive when they excise their shares. Secondly, you must notify HMRC within 92 days about the option grant.
- How much do you want to dilute the ownership of the company?
This question, of course, requires some long-term thinking. It’s quite easy for a growing start-up to issue too many shares and reduce the value of existing investors’ holdings (including their own). This can also put off future investors in the company and also reduce the positive impacts employee ownership has on your current team/shareholders.
Every share option should be carefully considered, and ‘good’ and ‘bad’ lever rules are also vital in this regard. There’s a range of scenarios where you do not want an employee walking away with a percentage of your company.
- Communicate the benefits to your people
The most common way companies fail to leverage their incentive plan for better performance is by not talking about it. Treating this like any marketing campaign is the way to go about it – you build up the excitement, have people tell and share stories, troubleshoot any anxiety people have about the plan, and run a communications campaign from emails to townhalls that really get the message across.
For a deep dive into how you best communicate your EMI scheme to employees, click here.
- Get experts on board
Start-ups are manic environments at the best of times. When a business is growing, and everyone is focused on that growth, it can be difficult to get anything new off the ground and even harder to get it right with no previous expertise. By contracting an outside expert like ourselves at Global Shares and utilising our enterprise incentive management software you’ll be able to focus on what you want out of the plan, not what you have to do to achieve it.
Enterprise Management Incentives – Grow with Passion
Offering part-ownership of a company has always been a way for star-ups to attract talent to their business before they could afford them. The EMI is an excellent way of wrapping this up into a defined plan with excellent tax benefits.
As with all these types of plans, there is an inherent risk (the company may go bust or the value of the shares go down) but on the flip side, an EMI will allow your people to benefit from your company’s success, and make it happen with real passion.
If you’re thinking of starting an EMI scheme or would like to improve an existing one, contact our experts by clicking here on the button below.