EMI, growth shares or unapproved options

On Vestd, you can choose to simply reward your teams with EMI options, growth shares or unapproved options, or a combination of them all.

This article is designed to lay out some of the issues that you should consider when choosing what is best for you and your team.

EMI, as a government-approved scheme, has elements that make it the most tax advantageous scheme both for the company and the recipient. However, there are relatively strict criteria around whether companies qualify and the recipients have to be employees who work at least 25 hours a week or, if less, 75% of their time for the company. Furthermore there are a number of administrational steps you need to go through, including getting a valuation for the company before starting the process.

If both the company and the employees qualify (and will continue to for the length of the scheme), then this is normally the best option from a value perspective. For detailed information, please read our series of articles on EMIs.

If either the company or the individuals don't qualify (for example they are advisers or you have maxed out on the allowable shares to be issued), then either unapproved options or growth shares might be the next best option.

Both alternatives have no restrictions on how much you can give an individual, nor do they have restrictions on the type of relationship the team member has with the company. They are quite different in nature however, and have very different tax treatment.

Growth shares are real shares in the company (rather than options to buy shares in the future) that are issued when the recipient agrees to the conditions that are being set for them. Once the conditions are met, they will receive dividends if any are issued, and you can choose whether they are voting or non-voting. Critically they will only share in the growth in value of the business from that point. This means that they are not subject to a tax charge when they are given to the recipient (as they have no value at that point). On any eventual sale of the shares the recipient will only need to pay capital gains tax.

In order to give the recipient assurance that they have them at the right value, a valuation of the business is required before you issue growth shares. We can suggest a solution for this, if required.

If the conditions that you have set in the shares are not fulfilled, then the growth shares are converted into deferred shares, which have no material value (so are in effect cancelled).

Unapproved options are perhaps the easiest to set up, as there is no need to worry about the value of the business at the time, however their tax treatment is arguably the worst - as whenever the recipient exercises their options, they will be liable to pay income tax on the full value they receive (value at time, less any exercise price).

For more details on both of these alternatives, please look at our articles on growth shares and unapproved options.

Our team, content and app can help you make informed decisions. However, any guidance and support should not be considered as 'legal, tax or financial advice.'