EMI share options and investment opportunities
Fast growing entrepreneurial business that implement Enterprise Management Incentive (“EMI”) share options are very frequently the same businesses looking for external funding from venture capitalists (“VC”), or seeking investment from individuals under the tax-advantaged Enterprise Investment Scheme (“EIS”).
But how do these work together? Here are five things you need to know if you’re thinking about EMI and external funding, or if you have an EMI already in place and are looking for investment.
EIS and EMI follow the same rules. If your company qualifies for EIS, it will almost certainly qualify for EMI.
However, there is a trip hazard with regards to share capital. EIS must be offered in new ordinary shares which don’t carry preferential rights. Consequently, if your EMI uses restricted shares – for example, without voting or dividend rights - then the EIS shares may by default be seen as “preferential”. There is a risk of losing the EIS status, and the tax breaks that go with it.
How much control does your VC want? EMI is only available for independent companies – i.e. companies not under the control of another company. If you have a corporate VC that wants a controlling stake – or even the opportunity to take control if certain targets aren’t met – then your company runs the risk of failing the independence test for EMI.
Similarly, a company won’t qualify for EMI if it’s part of a joint venture. So if you have partnered equally with another business, you will need to check that this doesn’t preclude EMI option grants.
Changes to articles and share rights. If you already have EMI options in place, and then obtain investment from a VC investor, they may wish to put in place changes to your company’s constitution – e.g. your Articles of Association. Beware! If these changes result in an amendment of the EMI option holders’ rights, this could be seen by HMRC as the grant of a new option – which will need to be notified to HMRC. Should the changes result in a change which causes an increase in the value of the shares under option, this could be a disqualifying event – meaning that you could lose the EMI tax benefits altogether.
None of these issues is insurmountable – you just need to be aware of them. Ensuring your plan is administered correctly after EMI option grants have been made can help avoid pitfalls like this.
If you would like to speak to one of our specialists regarding any of the points covered in this article, call us on 020 8949 5522, or email us via firstname.lastname@example.org