EMI scheme for high-tech company

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EMI scheme for high-tech company

We designed and implemented an EMI scheme for a high-tech, app based company. The company wanted to retain its employees to build up the company for sale. The company qualified for the EMI scheme, thus providing considerable tax advantages for the employees.  Additionally, when employees exercise their EMI options, the company will gain a substantial corporation tax deduction, equal to the employees’ tax savings.

EMI scheme: first steps

We reviewed the company’s proposed share options to ensure they qualified for EMI tax relief.  At the time, the conditions an employee and the company must satisfy to qualify for an EMI scheme were:

  • The company has fewer than 250 employees
  • The gross current assets of the company do not exceed £30 million
  • The employee works at least 25 hours a week for the company, or if less, for at least 75% of their working time
  • The employee individual limit for EMI options is currently £250,000

We prepared a preliminary “back of the envelope” company valuation so the employer and employees could consider:

  • What the options were actually worth;
  • Whether they wanted to implement the EMI scheme.

Once we had the go-ahead, with the company we:

Drafting the EMI scheme

We drafted the EMI scheme to permit the employer to:

  • Determine when the options could be exercised;
  • Retain some flexibility to reward the employees ahead of an exit;
  • Encourage employees to hit performance targets.

We next revised the company’s articles and shareholders agreement to clarify how the majority and minority shareholder would behave towards each other.

Drag-along provisions

To ensure employees could not delay or prevent any future company sale, we included drag-along rights.  Under a drag-along provision, when one or more shareholders who together hold a certain percentage of shares, sell their shares to a third party, the remaining minority shareholders must also sell their shares on the same terms to the third party.

Tag along provisions

We protected the minority shareholders with tag-along provisions. These provide that a shareholder holding a certain percentage of shares cannot sell their shares to a third party unless it procures that the third party buyer also offers to purchase all other shares of the other shareholders at the same price.

Good & bad leaver provisions

The company did not want an employee to leave the company, and take shares with them. So we included good and bad leaver provisions in the articles. These provisions mean that when an employee leaves a company, there is an automatic transfer of the employees’ shares.

Employees will be treated as:

  • Good leavers: typically on death, disability and sometimes, redundancy, who get “fair value”.
  • Bad leavers: dismissed for other reasons or resigning, who get par value or the price paid on subscription if higher.

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.