The five key benefits of EMI share option schemes
An EMI option scheme is by far the most beneficial tax-advantaged share option arrangement for an employee. These are what I believe to be their five key benefits:
The first and main benefit of EMI is the array of tax advantages for employees. There is no income tax to pay when the options are granted or when they’re exercised to buy the shares. When an employee sells the shares, they will pay only 10% Capital gains tax on any profit. Without EMI, they would face paying up to 45% income tax instead.
Second, the way that the scheme can be set up is very flexible. The only real limit set down in legislation is that options must be exercisable within 10 years. So employees can be given the right to buy their shares at any time from immediately to the 10 year limit. The majority of our clients use an exit only vesting arrangement; this means that the employees can only buy their shares when the company is sold. The other clients use a time-based structure, such as vesting over the first three years after the options are granted, rather than waiting until an exit event.
The third benefit is that the options provide a very tangible incentive for key employees to stay with the company. The prospect of a significant profit within a foreseeable period strongly encourages retention of staff, especially as most option agreements provide that options lapse automatically if an employee leaves and results of other basic checks (got mine here).
Fourth, it’s been shown that employees feel much more aligned with the interests of shareholders and the board if they have a tangible interest in the company’s ownership. It can be a great motivator if all stakeholders are working towards a profitable exit, with everyone focused on building shareholder value.
Finally, the fifth benefit: a psychological advantage; share options make an employee feel more appreciated, because options are a benefit that can be awarded alongside the usual salary package and they’re about the longer term. It says ‘we want you to stay with us and help grow the business, because we really value your input’.