When is the right time to implement an EMI scheme?

When it comes to safeguarding your company’s future, there are many ways to secure your essential assets. However, one of the most important parts of a business is often overlooked - your people.

Your human resources are one of the most crucial ingredients for your ongoing success. Correctly retaining, incentivising and rewarding them can be a powerful tool.

EMI schemes are a flexible, potentially low-cost way to align your employees’ incentives with those of your business and create peace of mind going forward.

Martin Thomas explains the wide variety of options available for business owners when it comes to setting up and tailoring EMI schemes to benefit your team and your future.

Introduction to EMI schemes

Enterprise Management Incentive (EMI) share schemes are a means of offering your employees a share of ownership in your business under conditions set and managed by you. These schemes align your goals with those of your employees by giving them a direct stake in your success.

While many entrepreneurs think of share options in relation to large businesses or hyper-growth startups, they are actually suitable for companies of most sizes. Not only are they relatively easy to set up, but they can personalised to a fine degree of detail to suit the exact needs of your business.

As a legal agreement between company and an employee, EMI schemes are directly tied to continued employment. This can make them extremely useful for retaining key staff. While employees will need to meet certain conditions, such as minimum working hours, the schemes are permitted for the vast majority of trades and can be implemented according to your needs.

What sort of businesses are suitable for EMI schemes?

EMI schemes are suitable for any business that wishes to protect and encourage valuable staff.

Circumstances where this might be appropriate include:

• Retaining and incentivising high performing staff

• Protecting key hires in a competitive job market where there is a high chance of them being poached by other businesses

• Preparing your business for sale to retain key team members for subsequent owners

• Creating security for long term value provision on key hires

For example, the two most common sectors I see for EMI schemes are technology and recruitment businesses.

In the case of the former, key hires such as Senior Developers have the potential to deliver significant long term value - for example by creating a particular product. In this case, it can make sense to retain them for the length of the project and give them a stake in its success.

In the case of recruitment businesses, we often see agreements put in place to retain high revenue generating team members and strategic thinkers.

Why are EMI schemes attractive for businesses

Changing circumstances can have long lasting effects on businesses, which has been especially true during the global pandemic. In tough times, entrepreneurs learn to operate more leanly, cutting costs and manage staff levels. This can actually end up as a positive, with businesses doing more with less.

A lean, efficient business is instantly more attractive for sale, driving many business owners to think of their future.

• While team members can be replaced in the event of leaving, the cost of hiring, including time and recruitment consultant fees, is often greater than the cost of setting up an EMI scheme.

• The eventual cost to the business of shares can then be offset against - or tied directly to - the value created by that employee.

• In the event that the employee leaves before the terms of the agreement are fulfilled, the company is protected.

Why do employees choose EMI schemes?

EMI schemes are an extremely attractive way to tie input to reward for an employee. Not only does the employee have a chance to benefit directly from their work in the company according to the terms in the agreement, it can also be more efficient than direct salary payments.

Capital generated in the event of a sale or other exit event is taxed at a much lower level than upper-level salary contributions, so the employee keeps more of their income.

How EMI Schemes work in practice

The process of setting up an EMI is straightforward and low cost, but does require the support of an advisory professional. There are three key stages:

1. Valuation of the business: In order to allocate the team member an appropriate share of the business commensurate with their contribution, the business as a whole is valued and then this is applied to the shareholding being offered under the EMI. In most cases a discount factor is applied to the EMI shareholding as this typically represents a minority.

   This means that if an employee is allocated, say, 5% of a business valued at £1m, they won’t pay £50,000 when they exercise them. A more reasonable value would be £15,000-£25,000.

2. HMRC clearance: The valuation and allocation is then cleared with HMRC to ensure that the business and the employee both satisfy the necessary conditions.

3. Agreement: The valuation is then put into an agreement, signed by both company and employee and then registered with HMRC.

How to implement EMI schemes

While signing away a part of your business can seem daunting, the terms of EMI schemes give business owners a large degree of control and flexibility.

One of the most common ways to manage the terms of a scheme is to tie the shares to an ‘exit event’ such as a sale or public offering. In this event, the percentage of the business owed by the employee is applied to the new valuation and the employee receives the capital, minus the agreed original discounted price.

This approach has several key advantages:

• The employee does not have the rights of a minority shareholder, as they do not take ownership until just before the exit event

• The employee does not need to find the money to ‘buy’ the shares at the discounted price - it’s instead deducted from the share value at sale. This gives the employee an incentive to grow the business value.

Tailoring EMI schemes

While exit events are a popular way to manage EMI schemes, they can be tailored to the specific needs of the business or the value of the employee. Other options include:

• Performance conditions: Tying shares to performance according to set KPIs such as turnover generated, for sales roles, or profit, for operational or management roles.

• Tenure: Schemes can be used to encourage employees to stay with the business longer by tying percentage allocations to progressive tenure.

Schemes can also employ a combination of tactics - for example, allocating some shares in accordance with short term performance and additional options for longer service or more complex targets.

How we can help protect your future

EMI schemes can be as unique as your business, that’s why every conversation starts with helping you work out your unique vision or goals. We work with a variety of companies to help them create schemes that can deliver long term value and security.

From valuation through contract negotiations and future revisions, from our office in Reading, we partner with you for the long term to make sure you have the support you need.

Find out more about why you should consider and employee share scheme.