How To Set Up EMI Options For Your First Hire

Can you give EMI options to your first hire without making a mess of your cap table, tax position or future fundraising?

Yes, you can, and for many UK startups, EMI options are one of the cleanest ways to offer equity to an early employee. The good news is that you don't need to hand over shares on day one. You can give your employee the right to buy shares later, usually after they have stayed with the business and helped it grow.

The part that needs care is the setup. EMI options work best when the commercial deal, company approvals, valuation and HMRC filings all line up from the start.

Can You Give EMI Options To Your First Employee?

Yes, you can give EMI options to your first employee if your company, the employee and the option terms meet the EMI rules.

EMI stands for Enterprise Management Incentives. It's a UK tax advantaged employee share option plan, often set up as an employee share scheme, designed for smaller trading companies. Instead of giving shares straight away, you grant an option. Your employee can exercise that option later, which means they can buy shares if the conditions are met.

For options granted on or after 6 April 2026, some of the key company rules for most companies are:

• Your company must have gross assets of £120 million or less.
• Your company must have fewer than 500 full time equivalent employees.
• Your company must carry on a qualifying trade and have a permanent establishment in the UK.
• Your company must not be controlled by another company.
• The total value of unexercised EMI options across the company must not exceed £6 million.

The older limits of £30 million in gross assets, fewer than 250 full time equivalent employees and a £3 million company option limit generally apply to options granted before 6 April 2026, and to certain specified Northern Ireland companies.

Your employee also needs to qualify. Usually, they must work for your company for at least 25 hours a week, or at least 75% of their total working time if that's less. They also can't have a material interest in the company, which broadly means they can't already control too much of it.

For one first hire, these thresholds are often manageable. The main point is to check them before you promise equity in an offer letter or employment contract.

What Should You Decide Before Drafting The EMI Documents?

You should decide the commercial shape of the offer before anyone starts drafting the EMI option agreement or option deed.

This is where many early stage companies get stuck. You might know that you want to offer equity, but the documents need much more detail than that. A vague promise like '1% equity' can cause confusion later if you haven't defined the share class, vesting, exercise price and what happens if the employee leaves.

Before drafting, decide:

• How many shares are under option: Is it a fixed number of shares or a percentage of the fully diluted share capital?
• Which share class applies: Will the options be over ordinary shares, growth shares or a separate class created for employees?
• The exercise price: This is often set at the agreed market value at grant, to preserve the intended EMI tax treatment.
• The vesting schedule: Many startups use four year vesting with a one year cliff, but your plan should fit your hiring strategy.
• Leaver rules: What happens if the employee resigns, is dismissed, becomes seriously ill or is made redundant?
• Exit treatment: Can options be exercised if the company is sold, lists or completes a major share sale?

Say Priya runs a SaaS startup with 1,000,000 shares on issue. She wants her first senior developer to have the chance to earn 2.5% over time. Instead of issuing shares immediately, she grants options over 25,000 shares. If the agreed actual market value is £0.20 per share, the exercise price is £5,000 in total if all options vest and are exercised. The options vest over four years, so the employee earns the right gradually rather than receiving the full benefit on day one.

What Documents Do You Need For An EMI Option Scheme?

You usually need plan rules, an option agreement, company approvals and supporting company documents that all work together, sometimes alongside a share vesting agreement.

An EMI scheme isn't just one form. For your first employee, you may be tempted to use a simple template, but templates often miss the parts that protect your company if someone leaves, a funding round happens or your Articles don't match the option terms. Your documents work best when they're tailored to your company structure and growth plans.

EMI Option Agreement Outline

A lawyer should tailor this before you use it, but a practical EMI option agreement often covers:

1. Parties: Name your company and the employee receiving the option.
2. Option Shares: State the number and class of shares under option.
3. Exercise Price: Record the price payable per share when the option is exercised.
4. Grant Date: Identify the date the option is legally granted.
5. Vesting: Explain when the option becomes exercisable and any performance conditions.
6. Exercise Process: Set out how the employee exercises the option and pays the exercise price.
7. Leaver Rules: Explain what happens to vested and unvested options when employment ends.
8. Exit Events: Cover what happens on a sale, listing or other company exit.
9. Restrictions: Refer to any limits on share transfers, drag along rights and compulsory transfer rules.
10. Tax And HMRC Conditions: Record the EMI intention and employee confirmations needed for the scheme.

You should also check your Articles of Association and any shareholders agreement. If they don't allow the right class of shares, leaver provisions or transfer restrictions, you may need to update them before granting options.

Do EMI Options Need Board, Shareholder Or HMRC Approval?

EMI options usually need board approval, may need shareholder or investor approval, and must be reported to HMRC after grant.

Your directors should approve the EMI scheme and the specific grant. Board minutes should record the key terms, confirm the company has checked eligibility and authorise someone to sign the documents.

Your company documents still matter. Although Companies Act employee share scheme exceptions may apply to statutory allotment authority and statutory pre-emption rules, your Articles, shareholders agreement or investor consent rights may still require shareholder approval, amendments to the Articles, or specific approvals before options are granted or shares are issued on exercise.

HMRC doesn't pre approve the whole EMI scheme. However, you can ask HMRC Shares and Assets Valuation to agree a valuation before grant. For EMI, you'll usually submit a VAL231 form with details of the company, share rights, accounts and any recent funding. HMRC will usually agree both actual market value and unrestricted market value. The unrestricted market value is relevant for EMI limits, including the £250,000 individual limit and the company option limit. For most companies, that company limit is £6 million for options granted on or after 6 April 2026. The older £3 million limit generally applies to options granted before that date and to certain specified Northern Ireland companies.

After grant, you need to register the EMI scheme through HMRC's Employment Related Securities online service and notify the option grant. For EMI options granted on or after 6 April 2024, the notification deadline is 6 July after the end of the tax year in which the option is granted. Options granted before 6 April 2024 had a 92 day notification deadline. You also need to file an annual ERS return by 6 July each year, including a nil return if there have been no reportable events.

How Do You Set Up EMI Options Step By Step?

You can set up EMI options in a clear sequence so the legal, tax and company administration steps don't trip over each other.

A sensible process looks like this:

1. Check EMI Eligibility: Confirm your company, trade, group structure and employee meet the EMI rules.
2. Review Your Cap Table: Work out the current share capital, existing option pool and fully diluted percentage.
3. Check Your Articles And Shareholders Agreement: Look for investor consent rights, share issue restrictions, pre-emption rights, leaver clauses and drag along provisions.
4. Decide The Commercial Terms: Agree the number of options, share class, vesting, leaver rules, exercise price and exit treatment.
5. Get A Valuation: Prepare the HMRC valuation submission and wait for agreement before granting the options where possible.
6. Prepare The Documents: Draft the EMI plan rules, option agreement, board minutes, shareholder resolutions and any Articles updates.
7. Approve The Grant: Hold the board meeting and obtain any required shareholder or investor approvals.
8. Sign The Option Agreement: Make sure the grant date is clear and consistent across all documents.
9. Notify HMRC: Register the scheme and submit the EMI notification through the ERS online service by the deadline.
10. Keep Records: Store the signed documents, valuation correspondence, board minutes and option register together.

At grant, you usually won't file anything at Companies House because no shares have been issued yet. If the employee later exercises the option and new shares are issued, you'll need to update your statutory registers and usually file a return of allotment, Form SH01, at Companies House.

What Can Go Wrong If You Rush The First Grant?

The main risk is that your employee thinks they have been promised equity, but the legal and tax position doesn't support what you intended.

That can create awkward conversations during a funding round or exit, especially if investors ask to review your cap table, option documents and HMRC filings. A messy first grant can also make it harder to offer options consistently to future hires.

Common issues include:

• No agreed valuation: If the exercise price is too low, the employee may face income tax and National Insurance contributions on exercise.
• Late HMRC notification: Missing the EMI notification deadline can mean the option doesn't get EMI tax treatment.
• Unclear percentage promises: Saying '1%' without saying whether it's issued share capital or fully diluted share capital can cause disputes.
• No leaver rules: Without clear rules, you may struggle to deal with unvested options if the employee leaves after a few months.
• Articles don't match the option terms: Your company constitution might block the share issue or fail to include the transfer controls you expected.
• No investor consent: If your shareholders agreement requires consent for new options, a grant made without consent can breach that agreement.

If something has already gone wrong, gather the signed documents, emails about the equity promise, board minutes, shareholder documents and any HMRC submissions for an employee share scheme review. Then get advice before trying to fix it informally. Depending on the issue, you may need fresh approvals, corrected filings, amended documents or a carefully handled conversation with the employee.

Key Takeaways

• EMI options can be a strong way to offer equity to your first hire without issuing shares straight away.
• For options granted on or after 6 April 2026, most companies must meet the updated EMI limits, including gross assets of £120 million or less, fewer than 500 full time equivalent employees and a £6 million company option limit.
• Older EMI limits generally apply to options granted before 6 April 2026 and to certain specified Northern Ireland companies.
• HMRC valuation and ERS notification steps matter. For grants from 6 April 2024, the EMI notification deadline is 6 July after the end of the relevant tax year.
• Your Articles, shareholders agreement, investor consent rights and cap table should match the option terms before you grant anything.
• Clear vesting, leaver and exit rules help protect your business as it grows.

If you'd like help with your EMI option scheme, option documents, company approvals and HMRC notification steps, you can reach us at 08081347754 or team@sprintlaw.co.uk for a free, no-obligations chat.