When is the best time to grant EMI options?
It goes without saying that, when share prices are low, that’s a good time to grant options, if only because it creates the possibility of greater gains for employees when the share price rises.
For private company owners thinking about granting Enterprise Management Incentive options ("EMI"), there are some specific points to take into consideration as regards timing and valuation.
When share options are exercised, the issue of new shares will result in dilution for existing shareholders. If you grant when the share price is low, you can provide the possibility of a bigger increase in value but for a smaller percentage of equity. Granting options at an early stage in the company lifecycle should result in bigger gains for employees, and lower dilution for founders.
Plan ahead for investment
If you’re looking for investment, best to make your option grants well in advance not only of the investment itself, but before any firm negotiations are entered into. Don’t assume that just because you haven’t taken in the investment yet that you don’t need to tell HMRC – if you’re already talking about the value with a third party, you’re best disclosing this when you agree the valuation. Those discussions may result in a higher valuation in the shares, so granting options sooner rather than later is advisable to make the most of a pre-investment share value.
Private companies will often offer “exit only” EMI options – ie options that only become exercisable when the business is sold. If this is your intention, get the options in place as soon as you can and definitely well before you start talking to potential buyers. This is for three reasons:
Firstly, if you have entered into Heads of Terms with another business wishing to buy yours, your company may not qualify for EMI at all because these constitute “arrangements” whereby your company could cease to be independent.
Secondly, if the company is sold within 2 years of the EMI options being granted, the EMI option shares will not qualify for the expected beneficial entrepreneurs’ relief treatment.
And, finally, the closer to sale the business, the higher the valuation likely to apply to the shares, and the smaller the potential gains for the participants.
The value of your company’s shares is a key part of the success of your EMI plan. As the owner of your business, you will have the best understanding of how your company is performing financially, and how it is likely to perform in the short to medium term. You will also have a clear idea of whether you’re seeking outside investment, or a buyer, and the likely value that you’re seeking. From this, you will be able to identify the best timing for the grant of EMI options for your business.
If you’d like help with EMI options, or if you’re worried you’ve left it too late, call us on 0208 949 5522 or email email@example.com and we can help identify the best and most timely route for your EMI options.