What is a stock option scheme for a UK startup?
Here in the UK, there are two types of option schemes that startups can do
EMI Options Scheme which is only applicable to PAYE Employees.
Unapproved Option Scheme which is for Contractors, advisors in general staff not on PAYE.
So when is the right time to put an options scheme together? I get asked a lot about this and also hear a lot of founders talk about options but not actually understand the how or the risk to the company.
For me, there are a number of right times to set up a scheme and they probably are:-
Growing your team
Traction is gaining more and more.
Fundraising, in fact, you may be asked by a VC to create an option pool.
Finances are stable in the company and you are scaling up.
When you are recruiting in a competitive marketplace and it’s not all about salary.
What is the EMI Scheme and what is an unapproved company scheme?
So let’s look at the EMI (Enterprise Management Incentive) option scheme is pretty much the norm in the UK to reward employees with equity/stock. The key difference between EMI and unapproved schemes is that HMRC will agree on a valuation for the company and strike price at which points options can be exercised. Obviously, you want the EMI valuation to be far lower than the actual company valuation so that staff make a gain.
The qualifying conditions are below in order to run an EMI Scheme:-
Actively trading and permanently based in the UK
Less than 250 employees when the pool is created.
Assets in total must be less than £30m
£3m or less is the allocation of stock.
Cannot be controlled via another business.
HMRC needs notification in 92days of the options granted.
A person cannot hold more than 30% of shares and also must be a legal employee of the company.
Must work 75% of their time on the business.
The value of options cannot be more than £250k per person.
The options are non-transferable and must be granted in 90days.
Options must be exercised within 10years of being granted.
When it comes to an unapproved option scheme the company sets the strike prices and when employees will exercise options.
The Setting up
Lots of companies out there that will help you. Prices really vary so shop around.
Process for EMI is usually
Pull together the options pool and documents that need to be created and approved at the board level.
Valuation report for HMRC. Would highly recommend you get 3rd party support on this. It’s called a VAL231 and usually has supporting documents and can take 4-6weeks. I am hearing currently it can take up to 8weeks.
HMRC will then come back with a valuation and you may need to haggle in the 90day period.
You will need to then grant the options and pass resolutions.
Then you will need to register the scheme to HMRC and on PAYE.
Yearly you will need to file an EMI annual return every July.
I cannot stress enough how important it is to get teams in your business around for the long haul. But also for the day, everyone aims to sell a business, or IPO that everyone in the building has a smile on their face. As a CEO, there is no need to be greedy, you might find things bite back at you when you hit challenges.
David Murray-Hundley Co Founder Pario Ventures