Granting EMI Options over Growth Shares

Advice and Talent

May 30, 2019

EMI Options are often compared to Growth Shares, but the two are not mutually exclusive: under certain circumstances, it is possible to grant Options over Growth Shares under an EMI Scheme, gaining the advantages of both.

Setting up an EMI Share Option Scheme can help you reward employees with a tax-efficient bonus if they meet certain conditions in the future. EMI Options are often compared to Growth Shares, as these serve the same purpose under different circumstances, requirements and restrictions.

The latter are, essentially, a separate class of incentive shares which grant participating employees a share the future growth in value of a company. This means that while the ownership of current shares stays the same, new shares are granted to employees if the company reaches a “hurdle” which is basically a growth target.

While Growth Shares serve almost the same purpose of EMI Options over Ordinary Shares, they do not have the same tax advantages, nor the specific requirements necessary for an EMI scheme. However, the two are not mutually exclusive: under certain circumstances, it is possible to grant Options over Growth Shares under an EMI Scheme, gaining the advantages of both.

Benefits

The main benefit of Growth Shares over Ordinary Shares, is that it does not affect dilution at the time the share is issued, because the share itself is conditional to whether the company reaches the set hurdle. This way, current shareholders won’t have their ownership diluted until the company has grown enough, aligning shareholder and employee interests.

Additionally, Options over Growth Shares granted under an EMI Scheme have the additional advantage of usually being priced below Ordinary Share Options, due to their conditional nature. This means that an employer might be able to offer the same amount of shares at a lower price, which can be useful not to surpass the threshold set by HMRC for EMI Options (up to £250,000 per employee, up to £3m in total) and means a lower tax liability for the employees.

Granting EMI Options over Growth Shares rather than regular Growth Shares also allows the employer and employees to take advantage of the EMI tax efficiencies:

  • For the employer: no tax liabilities are triggered, plus tax relief on the difference between the market value of the share at exercise and the option price paid.
  • For the employee: no income tax and employees’ NIC on either grant or exercise of the options. CGT on the growth in value of the shares at 10% rate instead of 20%.

EMI also allows companies to obtain agreement from HM Revenue & Customs (“HMRC”) as to the valuation of the shares under option – providing tax and valuation certainty to the company and employees alike.

Disadvantages

Growth Shares require a new class of share and may not be feasible in all cases. Care must also be taken if the company has or is looking for investment via the Seed Enterprise Investment Scheme (“SEIS”) or Enterprise Investment Scheme (“EIS”) as Growth Shares cannot have lesser dividend and/or winding-up rights than the SEIS or EIS Shares.

Although granting EMI options can be done with relative ease, there are a number of post-grant pitfalls that need to be aware of.

Requirements

As any other class of share options granted under an EMI Scheme, Options over Growth Shares have to be granted within the following limitations:

  • The company must have a permanent establishment in the UK, be carrying out a qualifying trade and be independent;
  • The gross assets of the company must not exceed £30m;
  • The employees involved must be working a minimum of 25 hours per week, or 75% of their working time;
  • Employees cannot hold unexercised options with a value over £250,000 in any 3 year period;
  • Employees cannot hold more than 30% of the shares or voting rights.

Interested in EMI Share Options?

Speak to Arram Kang

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