As part of setting up an EMI Option Scheme, you agree what the value of your company is with HMRC.
Sometimes founders get confused by this, because they've just been trying to argue up valuations with investors.
However - EMI valuations are completely separate - here's an example about why it's beneficial to argue your valuation down.
NewCo Ltd - without a discount
NewCo recently closed a funding round at a £2m pre-money valuation at £1 an Ordinary share
Later, NewCo wishes to grant employees some share options. NewCo could use the price of the last funding round as the strike price - (the price that the employee pays to buy the share) to £1 too.
2 years later, NewCo exits for £6.5m - or £3/share. The holder of the option makes a £2 profit.
This profit is taxed at the 10% entrepreneurs' relief rate.
NewCo - with a lower EMI valuation
Instead of accepting the previous funding round valuation, NewCo submitted a valuation report to HMRC, trying to argue down the valuation for its EMI Options.
This is normally done by granting options under a new share class, with fewer rights. For example, the share class for the options might not have voting rights.
HMRC agrees that the price of this share class is £0.50/share.
Now when NewCo exits at £3/share, the holder of the option makes a £2.50 profit - taxed at the 10% entrepreneurs relief rate.
SeedLegals has helped dozens of companies lower the price of their EMI options with our valuation report - hit the chat button to get started.