EMI Scheme Checklist For Startup Founders

Maya runs a SaaS startup in Manchester. She can't match the salary offers her lead developer is getting from bigger companies, but she can offer something those companies can't: a meaningful share in the upside if the business grows.

That's where an Enterprise Management Incentive scheme, usually called an EMI scheme, can be very useful. It lets you grant share options to key team members in a tax-advantaged way, while keeping control over when shares are actually issued.

The paperwork can feel technical at first, especially when HMRC filings, option terms and leaver rules all come into play. But with the right workflow, your EMI scheme checklist for startup founders can be practical, manageable and built around how your team actually works.

What Is An EMI Scheme And Why Use One?

An EMI scheme is a UK employee share option plan that lets qualifying companies grant tax-advantaged options to employees.

Instead of giving shares to a team member straight away, you give them the right to buy shares later. That right is called an option. You can set conditions around when the option vests, when it can be exercised and what happens if the person leaves.

For startups, EMI options are popular because they can help you:

• attract strong candidates when cash is tight
• reward early team members for helping grow the business
• align your team around a future sale, funding round or growth target
• avoid giving away shares too early, before someone has earned them
• create a more structured alternative to informal promises about equity

EMI schemes sit under the Income Tax (Earnings and Pensions) Act 2003 and are administered through HMRC's employment related securities system. The company law side also matters, especially your company constitution, articles of association, shareholder approvals and Companies House filings when shares are eventually issued.

A simple example helps. If Maya grants her developer an EMI option over 1% of the company, the developer doesn't own that 1% on day one. If the option vests over four years and is exercised on an exit, the developer only receives shares if the conditions are met. That gives Maya a retention tool without immediately changing the cap table.

Is Your Startup Eligible For An EMI Scheme?

Your startup may be eligible if it's an independent trading company, or the parent of a qualifying trading group, and it meets the EMI size, asset and activity rules.

This is the first checkpoint. If your company doesn't qualify at the date you grant the option, the EMI tax advantages may not apply.

Company Eligibility Checklist

At the time you grant EMI options, your company generally needs to satisfy these conditions:

• it must be a company, not a sole trader, partnership or LLP, so a restructure may be needed first
• it must have a permanent establishment in the UK
• it must be independent, meaning it isn't controlled by another company
• for most current grants, it must have gross assets of £120 million or less
• for most current grants, it must have fewer than 500 full-time employees
• it must carry on a qualifying trade, or be preparing to do so
• any subsidiaries must usually be qualifying subsidiaries
• for most current grants, the total value of unexercised EMI options over company shares must not exceed £6 million

Those higher limits apply from 6 April 2026 for most companies. The older limits of gross assets of no more than £30 million, fewer than 250 employees and total unexercised EMI options not exceeding £3 million can still matter for options granted before 6 April 2026 and for certain specified Northern Ireland companies.

The qualifying trade rule is often where startups need a closer look. Many technology, SaaS, ecommerce and product businesses can qualify, but some activities are restricted.

Excluded or sensitive areas can include certain financial activities, property development, leasing, receiving royalties in some situations, legal or accountancy services, farming, hotels and care homes. The detail matters, especially if your business has mixed activities.

For example, if your platform mainly sells your own software subscription, that's a very different profile from a company whose main income is lending money or dealing in land. If your revenue model is unusual, it's worth checking before you promise EMI options to your team.

Which Team Members Can Receive EMI Options?

Only qualifying employees can receive EMI options, so contractors, advisers and non-executive directors won't usually fit within EMI.

For each person receiving options, you'll need to check their working time, shareholding and option limits.

Employee Eligibility Checklist

Your proposed option holder generally needs to:

• be an employee of the company or a qualifying subsidiary
• work at least 25 hours per week for the company or group, or at least 75% of their total working time
• not have a material interest in the company, broadly more than 30%
• hold unexercised tax-advantaged options, including EMI and CSOP options, with an unrestricted market value of no more than £250,000 at the date of grant

The working time test is easy to miss in early-stage startups, especially when people have side projects, consultancy work or part-time roles. You should keep records showing how the test is met at the date of grant.

Since 6 April 2023, employees no longer need to sign a formal EMI working time declaration for new grants. Even so, you still need to be comfortable that they meet the working time requirement. The rule hasn't disappeared, only the old declaration requirement has changed.

If someone is a consultant today but you want to incentivise them with EMI options, you may need to consider whether they should become an employee first. That decision has wider employment, tax and commercial consequences, so don't treat the EMI scheme as the only reason for changing their status.

What Should Your EMI Option Terms Cover?

Your EMI option terms should clearly explain what the team member can receive, when they can receive it and what happens if things change.

This is where you turn the commercial deal into a legally workable arrangement. Templates often miss the details that matter most for your business, particularly around vesting, exits and leavers.

The Core Commercial Terms

For each grant, you should decide:

• the number of shares under option, or the percentage you want the option to represent
• the class of shares covered by the option
• the exercise price payable by the employee
• the grant date
• the vesting schedule
• the exercise period and final exercise deadline, which is generally up to 15 years for qualifying post-6 April 2026 grants, but may be 10 years for older grants or specified Northern Ireland companies
• whether the option can be exercised only on an exit, or earlier as it vests

Many startups use a four-year vesting period with a one-year cliff. That means nothing vests in the first year, then a portion vests at the first anniversary, with the rest vesting monthly or quarterly after that. You don't have to use that model, but you should be clear and consistent.

Exit-Only Or Exercisable Options

It depends on your goals, but many UK startups choose exit-only EMI options because they keep the cap table simpler until a sale or listing.

With an exit-only option, the employee exercises shortly before or at the time of a sale. This can make administration simpler because you don't have lots of small shareholders joining the company early.

With an exercisable option, the employee may be able to exercise once their shares have vested, even if there hasn't been an exit. That can feel more tangible for the team member, but it may create more shareholder administration for you.

You'll also need to think about what your investors expect. If you already have external investors, your investment documents may control the size of your option pool, the share class used and whether investor consent is needed.

How Should Leaver Rules Work?

Your leaver rules should set out what happens to both vested and unvested options when someone leaves your business.

This is one of the most important parts of an EMI scheme because people leave for different reasons. A senior developer resigning to join a competitor isn't the same as someone leaving because of illness, redundancy or a sale of the company.

Common Leaver Categories

Your EMI rules might distinguish between:

• good leavers, such as someone who leaves because of ill health, redundancy, retirement or another board-approved reason
• bad leavers, such as someone dismissed for gross misconduct or who breaches confidentiality or restrictive covenants
• other leavers, where the board has discretion to decide how the rules apply

You then need to decide what happens to unvested options, vested options and any shares already issued.

Common positions include:

• unvested options lapse when employment ends
• vested options can be exercised for a short period after leaving
• bad leavers lose all options, including vested options
• good leavers keep vested options but lose unvested options
• the board can allow extra vesting in special cases

Be careful with broad discretion. Flexibility is useful, but vague rules can create arguments later, especially if a leaver feels they've been treated differently from someone else.

You should also line up your EMI rules with your employment contracts, confidentiality obligations and post-termination restrictions. If someone leaves with sensitive product plans, customer lists or source code knowledge, your option documents shouldn't be your only protection.

What Approvals And Documents Do You Need?

You usually need board approval, carefully drafted EMI plan documents and a check of your articles, shareholder agreement and investor consent rights.

An EMI scheme isn't just an HR reward. It affects share capital, control and future investment, so your corporate documents need to support it.

Your EMI Document Checklist

A typical EMI setup involves:

• EMI plan rules, setting the general rules for the scheme
• individual option agreements, option deeds or grant letters for each employee
• board minutes approving the scheme and each grant
• shareholder resolutions, if needed under your articles or shareholder agreement
• updated cap table and option pool records
• HMRC valuation submission materials
• employee communications explaining the commercial terms in plain English

Your articles of association and shareholders agreement may include pre-emption rights, consent rights, drag along provisions, good leaver and bad leaver rules, or limits on issuing new shares. These need to work with your EMI plan, not against it.

Under the Companies Act 2006, you also need to think about authority to allot shares when options are exercised. Private companies can sometimes rely on simpler rules, but your articles or investor documents may still require specific approvals.

When shares are issued on exercise, you may need to update statutory registers and file a form SH01 at Companies House within one month of the allotment. Your next confirmation statement should also reflect the updated share capital and shareholders.

How Do HMRC Valuations And Filings Work?

You should usually agree the share valuation with HMRC before granting EMI options, then complete the required EMI notifications and annual returns on time.

The valuation step is where many founders slow down, but it's worth doing properly. A well-supported valuation helps you set the exercise price and reduces the risk of unexpected income tax or National Insurance issues for the employee later.

Agreeing A Valuation

For EMI purposes, you normally ask HMRC's Shares and Assets Valuation team to agree the unrestricted market value and actual market value of the shares.

The actual market value reflects restrictions on the shares. The unrestricted market value ignores those restrictions. Your accountant or legal team will usually help prepare a valuation note explaining the business, financials, share rights, recent funding rounds and proposed option terms.

HMRC valuation agreement is generally valid for 90 days. That means you should be ready to grant the options once the valuation is agreed, rather than starting the paperwork from scratch afterwards.

If the exercise price is set at or above the agreed actual market value, EMI options can often be granted without income tax arising on exercise, provided the EMI conditions continue to be met. Capital gains tax may apply when shares are sold, and some employees may qualify for Business Asset Disposal Relief if the relevant conditions are met. You should get tax advice on the numbers and treatment for your company and team.

Notifying HMRC

For EMI options granted on or after 6 April 2024, the deadline to notify HMRC is 6 July following the end of the tax year in which the option was granted.

For older grants made before 6 April 2024, the previous 92-day notification deadline is still relevant when reviewing historic compliance.

You notify EMI options through HMRC's online employment related securities service. You'll need to register the scheme, submit the option details and keep evidence that the company and employees qualified at the grant date.

You also need to file an annual EMI return by 6 July after the end of each tax year. This applies even if there has been no reportable activity in some cases, so make sure your calendar reminders are clear. Late or incorrect filings can lead to penalties and may put the tax treatment at risk.

Common Mistakes To Avoid

The most common EMI mistakes are usually process mistakes, not complicated legal issues.

If you're moving quickly, these are the ones to watch:

• Promising equity before checking eligibility: If your company or team member doesn't qualify, you may need a different incentive structure, such as a non-EMI or phantom share arrangement.
• Granting options after the HMRC valuation expires: If the 90-day window has passed, you may need to refresh the valuation.
• Forgetting investor consent: Your shareholders agreement may require approval before creating an option pool or granting options.
• Using unclear leaver rules: If the rules don't say what happens when someone resigns or is dismissed, you may face disputes at the worst possible time.
• Missing HMRC deadlines: For current grants, diarise the 6 July notification and annual return deadlines.
• Not updating the cap table: Options aren't shares yet, but investors will still want to see the fully diluted picture.
• Leaving employment documents out of sync: Confidentiality, IP ownership and restrictive covenants should support the incentive plan.

Another practical mistake is treating EMI as a one-off job. Your scheme should grow with the company. Funding rounds, new hires, promotions, exits, redundancies and restructures can all affect how your option plan works.

A light annual review can save a lot of admin later. Check who holds options, what has vested, whether anyone has left, whether filings are complete and whether your option pool still suits your hiring plans.

Key Takeaways

• EMI options can help your startup reward and retain employees without issuing shares straight away.
• Your company and each option holder must meet EMI eligibility rules at the date of grant.
• For most current grants, the increased company limits are £120 million in gross assets, fewer than 500 full-time employees and £6 million in total unexercised EMI options.
• Clear vesting, exercise and leaver rules are essential, including the correct exercise period for your grant.
• HMRC valuation and filing deadlines matter, including the 6 July deadline for current EMI notifications and annual returns.
• Your EMI scheme should be reviewed as your team, funding and cap table change.

If you'd like help with setting up your EMI option documents, checking eligibility, drafting leaver rules or managing your HMRC filing workflow, you can reach us at 08081347754 or team@sprintlaw.co.uk for a free, no-obligations chat.