How to grant EMI options

Step 1 is for the Directors’ of the company to provide permission for options over the shares in the company to be granted. If you have standard model articles this can be done by passing a Directors’ resolution.

However you may need to pass a shareholder’s resolution as well if you have customised articles which mean shareholders need to give permission for options to be granted. The need for a shareholder’s resolution is most commonly seen in companies which have received Series A+ funding rounds. If you are unsure if you need a shareholder’s resolution then you can consult with Pett Franklin.

Step 2 is to check that the company meets the criteria to be a qualifying company. You can check the requirements on the TechFranklin Docs page. If you are unsure if you qualify then you can consult with Pett Franklin.

Step 3 of obtaining a tax valuation is not strictly needed but is strongly advised. Essentially a UMV and AMV per share is pitched to HMRC and two weeks later (although it can take longer) HMRC will respond with written confirmation agreeing to the valuation. The valuation agreement from HMRC is valid for 120 days from the date of agreement. If you need an EMI valuation then Pett Franklin can provide this to you.

Step 4 is to design the options. The main things to determine are which employees will receive options and

  • The share class under option (if you have more than one class of share)
  • Number of shares under option
  • Exercise price
The number of shares under option is just as important as the exercise price since the dilutive impact of options is a function of these two variables. The mathematics of option dilution can get complicated and therefore we recommend before granting options you experiment and tinker with TechFranklin’s free dilution modelling tool.
As well as the key clauses you may want to customise the options to include clauses such as
  • Exit only
  • Good leavers
  • Time based vesting
  • Performance conditions
A note on performance conditions. Including performance conditions in EMI options is risky. This is because in performance conditions are not drafted in a sufficiently objective way then the option may not constitute the right to acquire a share and therefore would not be in compliance with the EMI legislation. Therefore if you are considering including performance conditions you should consult with experienced professional advisers in the area of EMI.
Step 5 is to notify HMRC of the grant of options 92 days after the date of award. This step is crucial as otherwise the options will not be eligible for EMI treatment and will be taxed as unapproved options, which is much less favourable. To see exactly how much less favourable you can use TechFranklin’s free EMI vs Unapproved option tax calculator.

If  you’d like to learn more about EMI options then contact us via: