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:
- Gained traction;
- Raised funds; or
- 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 Strike Price (known also as the Exercise Price)?
When putting an EMI Scheme in place, HMRC will agree the Strike Price based on:
- The price per share of the company’s previous funding round, or
- The company’s financial status if there has not been a previous funding round involving the same share class as the option shares.
The lower the Strike Price, the easier it is for employees to exercise their share options and turn them into shares. This is because there will then be less income tax on the receipt of those shares, and employees will also enjoy the full benefits of an upside upon an exit event.
At SeedLegals, we’ve created the first ever tool automating the valuation report based on your company's financials. In the majority of cases, when you offer options in a share class that has not previously been bought by investors (i.e. there has not been a prior market transaction for those shares), we are then able to achieve a 90%+ discount on the the price per share of your previous funding round.
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 HMRC valuation reviewed by a member of our team in as little as one day.
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.