EMI & EIS scheme: digital media business

Employee incentives and linked external investment

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EMI & EIS scheme: digital media business

Our client, operating in the digital media sector, wished to grow his business and incentivise his employees. Our client considered these essential steps to creating a high value business. However, the equity incentive scheme also had to impress future investors.

EMI scheme

The company did not pay dividends. It re-invested all profits. Consequently, prior to exit, there was no particular reason for employees to own shares. It would be more advantageous if the employees owned options.

We discussed tax-efficient equity incentives schemes, and settled on the Enterprise Management Incentive (EMI) scheme.  Together, we prepared a tax market valuation for the EMI options. We explained that HMRC does not require an agreed tax market valuation when the company grants the options. However, the agreed valuation avoid potential difficulties, e.g. it is trickier to agree a low option valuation, when selling a high value business.

We prepared a business review and proposition, and framed it so HMRC would accept it without prolonged negotiation. HMRC did not challenge our valuation.

Once we agreed the tax market value, we issued EMI options that represented 20% of the company’s equity to key employees. These employees gained the option to acquire the shares when the company was acquired. Thus these employees would gain any growth in the company’s shares valuation.

The employees will also benefit from Entrepreneurs’ Relief. When they employees sell their shares, they will pay 10% capital gains tax on the increased value.

Investment using EIS scheme

After the company issued the EMI options, it sought additional investment. The Seed Enterprise Investment Scheme was inappropriate, as the company had traded for over two years. However, the Enterprise Investment Scheme was appropriate, because the company:

  • Was wholly owned by one individual,
  • Based in the UK,
  • Software development was not a disqualified trade,
  • Net assets were under £15m;
  • Employed fewer than 250.

The EIS  scheme was particularly appropriate because our client focused on capital growth. EIS investors gain  income tax relief on subscription for the shares, and capital gains tax free growth.

Together we prepared form EISaa, an EIS advance assurance application for HMRC. Usually, HMRC takes five to six weeks to agree an EIS advance assurance.  During this period, we:

  • Prepared the investment agreement, including
    • Acceptable investor protections;
    • Investor’s rights.
  • Ensured our client complied with the Financial Services and Markets Act (Financial Promotion) Order (FSMA), i.e.
    • Client did not send improper communications.
  • Reviewed and protected the IP portfolio.

HMRC provided EIS Advance Assurance.

The outcome

Within a few months, the client had achieved his goal of incentivising his employees and raising significant investment in his business. On the eventual sale of his business his EIS investors will pay no capital gains tax and the client and his employees will pay 10% capital gains tax.

Helen Curtis is a member of the employee share plan team.  There are many surveys and statistics which show that companies with employee share plans in place out perform those without.  We implement a wide range of solutions for a wide range of business needs.