Enterprise Management Incentive (EMI) options are one of the few tax-efficient ways for early-stage businesses to reward key people without draining precious cash. They also help you keep good hires during the years when you are building something from the ground up. The difficulty is that EMI rules are technical and a single mistake can remove the tax advantages completely and permanently. (With that said, we at JPP Law have had experience of negotiating with HMRC and have had leniency and favourable EMI-status outcomes won for our clients).
If you are thinking about putting an EMI scheme in place, or you already have granted options to team members, it is worth getting proper advice early or have a fresh check up of your scheme completed this year – before it is too late. Your employee share option pool (often called an ESOP) is too important to get wrong. In the rest of this article, we explore the Big 5 problems we see often and which we can help with if you would like to know more……..
1 – Using “Full-Strength” Ordinary Shares Instead of a Tailored Employee Share Class
A lot of founders reach for ordinary shares for their employees because it feels safe, familiar and consistent. But this is not the smartest move in the Founders’ Playbook. The problem is that ordinary shares usually hold full voting rights, dividends and wide information rights. That means they tend to have a higher market value, which drives up the option exercise price – and ends up costing your employee more in the pocket!
A more practical route is to create a lighter share class specifically for employees. Removing rights that staff don’t need at an early stage often results in a much better option-valuation, which makes the exercise price more appealing and keeps the structure cleaner (votes to those who need them, no votes to those who don’t).
Before you create a new share class, please take legal advice from a qualified corporate lawyer (rather than an automated bot, AI, a platform, or non-lawyer). He or she will help you mould the employee shares into the company’s Articles seamlessly. When this is planned properly from the start, it normally leads to a far better long-term structure, happy staff and an option scheme that actually works and pays out properly for the employee shares upon exit. (We have heard of some non-paying option schemes and horror stories you will want to avoid!)
2 – Treating EMI As a “One and Done” Project – NO – it needs some follow up and attention
It is very common for companies to draft the documents, sign the option agreements and send to employees, thinking it is done and dusted. No – every employee must sign and return in the allotted deadline, annual reporting must take place by 6 July every year, and individual option grants must be reported too or else EMI status will be lost and all your hard work wasted.
You need a clear system for tracking options granted, making HMRC filings, paying exercise prices, issuing employee shares, updating Companies House and meeting deadlines. Set timers, diary notifications or whatever it takes to keep those dates in sight, because once an EMI falls out of compliance it is very hard to repair the damage.
3 – What a Mix Up – Vesting vs Exercise
Vesting and exercising are often spoken about as if they are the same thing, and they’re not. Vesting is quite akin to the concept of earning. The vesting date is the date when the employee has earned the right to exercise the option (subject to all other terms and conditions of the option agreement being satisfied). Even after vesting, the option holder is still an option holder – they do not own shares at that stage.
Exercise is a separate step. It is the moment the employee actually acquires shares and becomes a shareholder – often by paying the exercise price (or by using whatever payment mechanism is allowed). Only after exercise do those shares form part of your company’s official share capital.
4 – In Sync – keeping your Option Scheme, Articles and Investor Agreements Aligned
Like a Jigsaw, your EMI scheme “pieces” should fit within your existing company framework seamlessly. Problems appear when companies grant options that clash with their Articles of Association or their shareholder agreements or if employee option contracts or equity promises are broken through miscommunication or error. Worst of all if a share option scheme contains mistakes, it can result in faulty share capital tables, voidable share issues, and the opportunity to sell the company may fail at the due diligence stage.
Before you amend or create an EMI scheme, you should look closely at:
- What your Articles allow around new share classes and share option pool
- Whether investor consent is needed
- Any pre-emption rights already in place
- Restrictions attached to other classes of shares
We have seen broken share capital tables and incorrect share option documents wreck the prospect of a company sale and wreck the goodwill between owners and employees which a share option scheme is meant to enhance, not destroy.
5 – When its time to say Goodbye – Leaver Terms and Exits
Leaver provisions decide what happens if an employee resigns, is dismissed or leaves unexpectedly. If an Option Scheme is unclear or inconsistent on what happens when someone leaves, defining when someone stops vesting their option, gets very ill, or dies, you can end up in drawn-out disputes.
You should be clear on:
- What happens to unvested options
- Whether vested options lapse or remain exercisable
- How long a departing employee has to exercise
- What happens to those shares on an exit event
If an employee holds even one single share at the time when the Company sells, his or her rights must fit with drag-along, tag-along and warranty arrangements – remember he or she will have to be a shareholder part-selling the Company also who logically sees and signs the share purchase agreement you are negotiating. (they may be even able to see what other employee shareholders are getting which could cause jealousy and friction). Thinking through these scenarios in advance with a qualified lawyer who has seen and navigated it all before is far easier than trying to fix them in the middle of a transaction.
Finally – some recent changes
The Autumn 2025 Budget brought in generous expansions to the EMI thresholds, which come into effect on 6 April 2026. These changes give companies more breathing room as they grow, especially those nearing the current limits.
The key changes are:
- Employee limit increasing from 250 to 500
- Gross assets limit increasing from £30 million to £120 million
- Total EMI options limit increasing from £3 million to £6 million
If you are close to any of these boundaries, you will have some thinking to do before launching a new share option scheme – depending on your hiring and incentive plans.
To Summarise: Get EMI Legal Advice!
EMI schemes reward staff and can dramatically strengthen a start-up’s ability to hire and retain good people. The issue is that EMI law can appear quite technical unless you’re familiar with it. Incorrect drafting or a missed filing can undermine the tax benefits and create long-term administrative problems. Investors and purchasers routinely review EMI schemes during due diligence. They will expect clean documentation and consistent rights across the board. Side deals and golden goodbyes for some employees will come out in the wash and always do!
For a solicitor who regularly drafts and audits EMI schemes, they can easily help you avoid missteps and protect your tax position. That small investment in legal advice now can make a big difference.
How JPP Law Can Help
JPP Law advises start-ups and scale-ups across England and Wales on EMI schemes, employee incentives and corporate governance. We draft EMI plans, review existing schemes, support valuations, prepare new share classes and help companies navigate reporting requirements.
If you are planning an EMI scheme or want existing documents reviewed, our commercial lawyers can guide you through the process with clear, practical advice.
To speak with a solicitor about your EMI plans, contact JPP Law today.
