EMI share options: how a UK startup gives equity to its team

Giving an employee shares outright creates an income tax charge on their value at the time, which is a bad surprise when the shares cannot be sold. An option avoids that: the employee receives the right to buy shares later at today's price, and nothing is taxed until something happens. Under the Enterprise Management Incentive rules, if the option is granted at market value and the conditions are met, there is no income tax on exercise and the eventual gain on sale is taxed as capital gain, usually with business asset disposal relief available after two years. For the company, the gain the employee makes is normally deductible against corporation tax. No other UK scheme is as favourable for early-stage companies, which is why almost every venture-backed startup uses it.

• Independent: not controlled by another company.
• Gross assets of no more than £30 million at the date of grant.
• Fewer than 250 full-time equivalent employees.
• A qualifying trade carried on wholly or mainly in the UK, with a UK permanent establishment. Excluded trades include property development, banking and insurance, leasing, and legal and accountancy services.
• Total unexercised EMI options of no more than £3 million by market value at grant.

The person must be an employee (a director counts if employed) working at least 25 hours a week, or at least 75 per cent of their working time if less, and must not have a material interest, meaning more than 30 per cent of the company. Each employee can hold EMI options over shares worth up to £250,000 at the date of grant. Advisers, contractors and investors do not qualify; for them use an unapproved option agreement and accept the less favourable tax.

The exercise price is set at the market value of the shares at grant. You can agree that value with HMRC in advance on form VAL231, supported by a short valuation report; HMRC's agreement is valid for 90 days. For a company with no revenue the agreed value is often a small fraction of the last funding round price, because ordinary shares without investor preferences are worth less than preference shares. Agreeing the valuation is not compulsory but it removes the risk that HMRC later says the price was too low and the options were not EMI at all.

Two things: a plan (the rules that apply to every option: eligibility, vesting, leavers, exercise, what happens on a sale or listing, adjustments for share splits) and an option agreement for each employee (the number of shares, the price, the vesting schedule, any performance conditions, signed by both sides). The company's articles need to permit the option shares to be issued, and the board must approve each grant. Our EMI share option plan and option agreement template contains both documents with the notes.

Time-based vesting over three or four years with a one-year cliff is usual; some companies vest on milestones instead. On leaving, unvested options lapse. Vested options are either exercisable within a short window (often 90 days, which keeps the EMI tax treatment if exercised in time) or, for bad leavers, lapse entirely. On a sale of the company, most plans accelerate vesting in full or in part and the options are exercised and sold on the same day, so the employee never has to fund the exercise price.

Each grant must be notified to HMRC online within the statutory window (currently by 6 July following the end of the tax year of grant, after the 2024 change from 92 days), and the company files an annual EMI return by the same date. Miss the notification and the option is not an EMI option. Put both dates in the diary when the board approves the grant.

Check the company qualifies, agree a valuation with HMRC, adopt a plan, sign an option agreement for each person, get board approval, notify HMRC in time. The plan and option agreement are £99 together, and are included in the Seed round pack. EMI rules change and the tax position depends on your facts; for a grant to a senior hire or a large pool, take advice.