Most founders understand the power of offering options to prospective employees when recruiting and retaining talent. It’s a great tool to align key employees with founders and investors on a long-term perspective for your startup, making sure everyone has an incentive upon exit.
We often get asked when is the perfect time to put your EMI Scheme in place. The right time will be different depending on the revenue of your company, the number of current full-time employees and fundraising and hiring plans for the near future.
Essentially, the right time is as soon as your company has either:
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Gained traction;
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Raised funds; or
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Started scaling its team.
With more and more startups now offering options to key employees, those joining the team will probably want and expect options on top of an annual salary in order to benefit from long-term value creation.
Why do you want a low EMI Valuation?
When applying for an EMI Valuation to grant EMI options, HMRC will agree the Actual Market Value (AMV) of a share based on:
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The price per share of the company’s previous funding round or arms length transaction
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If there has not been a previous funding round or arms length transaction, the company’s financial figures.
One of the main EMI tax benefits is that there is no income tax due if you set the exercise/strike price of an option (i.e. the price your employee will purchase a share for) to the AMV agreed with HMRC. If you decide to set the exercise price lower than the AMV agreed, tax will be paid on the difference between the two.
Consequently, getting a low valuation is greatly beneficial for the employees you're looking to incentivise.
When would you do an EMI Scheme - Before your First or Second Round?
As said above, a lower Strike Price is more beneficial, and so the objective of the company is to aim to agree with HMRC as low a valuation as possible. Obviously, before a funding round (be that your first or second round), your reference valuation will likely be significantly lower than what the post-money valuation will be after you close your round.
Because of this, it would be beneficial to grant options and put the EMI Option Scheme in place well ahead of a funding round to benefit from the reduced valuation.
Also, by creating your EMI Scheme and completing your EMI Valuation early on, before the company has raised funds or generated significant revenues, you can achieve a considerably higher discount. You'll then be able to grant equity to your employees at that discounted price for the next 90 days after the EMI valuation.
When would you do an EMI Scheme after your First or Second Round?
However, if you don’t have employees before your funding round and you’re only planning to hire people after getting funded, then you may as well wait until after your first round.
But here is the catch, If you wait too long after your funding, your valuation will go up as you use the new in-coming funds to continue building traction. And so it will be harder to argue for a lower valuation with HMRC.
Naturally, we see a surge in employees being hired after a funding round. So when you have just closed your round, it’s probably the right time to set up an EMI Scheme before recruiting. In fact, our data shows that the average time between a round closing and an EMI Scheme being put in place is just 1 month and 21 days.
How can I get started?
This was previously a long process but, on SeedLegals, you can get your option scheme set up and your valuation report generated easily and with the guidance of our Options experts.
Putting an EMI Scheme in place was traditionally a complex, time-consuming process. At SeedLegals, we’re changing and dramatically improving this.
Set up your EMI Scheme with SeedLegals now by booking a call with one of our experts.