How to use share options and EMI to attract and keep great people.

Most tech startups cannot match large company salaries. Share options close part of the gap by giving staff a stake in what they help build. They also align the team with long-term value. But options are only motivating if people understand them, and poorly designed schemes create tax bills, resentment or cap table problems. This is general information, not tax or legal advice.

How share options work

An option gives an employee the right to buy a number of shares at a fixed price (the exercise price) in the future, usually once conditions are met. Options typically vest over time; a common convention is four years with a one-year cliff. Many UK schemes for tech startups only allow exercise on an exit, such as a sale of the company. The employee benefits if the share value rises above the exercise price.

Enterprise Management Incentives (EMI)

EMI is a UK government-backed share option scheme with significant tax advantages for employees, as long as the conditions are met. At the time of writing, key conditions include:

• The company must be independent, with gross assets of no more than £30 million and fewer than 250 full-time equivalent employees, and carry on a qualifying trade (some activities are excluded).
• Each employee can hold EMI options over shares worth up to £250,000 at grant, and the company can have up to £3 million of unexercised EMI options in total.
• The employee must meet a working time requirement, broadly at least 25 hours a week or, if less, 75 percent of their working time.
• Options must be notified to HMRC by the deadline, and the company must file annual returns. Deadlines have changed recently, so check the current rules.

Many companies agree the share valuation with HMRC before granting, which gives certainty on the exercise price. EMI options are not available to non-employees, so advisers and contractors need a different arrangement. See tax and employee share schemes on GOV.UK.

Step by step

1. Decide the size of the option pool. Often somewhere around ten percent of the fully diluted share capital is set aside as a rule of thumb, but the right size depends on your hiring plan. Model it with the cap table and dilution simulator.
2. Plan allocations by role and seniority, with more for earlier and more senior hires. Keep a record of the reasoning.
3. Check EMI eligibility with an adviser who specialises in share schemes.
4. Agree a valuation and set the exercise price.
5. Document the scheme: scheme rules, option agreements, vesting and leaver terms, exercise conditions and board approval. Check whether your articles or shareholders’ agreement require investor consent.
6. Notify HMRC and keep up with annual reporting.
7. Explain it clearly to each employee: number of options, exercise price, vesting, what happens if they leave and an illustrative value at different exit prices.

Worked example

Saltmarsh is a fictional Norwich tech startup building marine survey software. It wanted to hire a senior engineer at below market salary. The founding team set aside an option pool sized for its next six hires, checked EMI eligibility, agreed a valuation and granted the engineer EMI options over just under one percent of the fully diluted share capital, vesting over four years with a one-year cliff and exercisable on exit. It gave her a one-page explanation with illustrative outcomes at three exit values, making clear these were examples, not forecasts. She accepted, and later said the clarity mattered as much as the number.

Common mistakes

• Promising percentages informally before a scheme exists.
• Missing HMRC notification or reporting deadlines and losing the tax advantages.
• Granting options to people who do not meet EMI conditions without realising.
• An option pool too small for the hiring plan, forcing a second dilution later.
• Failing to explain options, so staff value them at nothing.

What to measure

• Option pool granted, remaining and planned.
• Percentage of staff holding options.
• Compliance with HMRC notification and reporting deadlines.
• Employee understanding, tested by asking them to explain their own options.