UK Law and Practice Contributed by: Dylan Doran Kennett, Michael Jacobs, Stephen Newby and Mark Ife, Herbert Smith Freehills LLP
tion with investors) a certain proportion of their equity, based on the time served in the venture, would be either transferred/recycled to other founders or other stakeholders or more simply converted into valueless deferred shares. In more serious instances (such as fraud or gross misconduct – ie, “bad leaver” ), all shares held by the founder would be clawed back, transferred or converted into deferred shares to protect the company’s interests. Key employees are less likely to be issued equity upfront, unless they were onboarded early fol - lowing the incorporation of the company when share value is low and/or fundamental to the founding team. More commonly, key employ - ees would be rewarded through the company’s share option scheme, once implemented. In the UK, the Enterprise Management Incentive (EMI) scheme is the most common type of option scheme to implement for a venture-backed company to reward its employees, as it is spe - cifically designed for early-stage, high-growth companies (eg, qualifying conditions include that the company’s gross assets must not exceed GBP30 million and it must have fewer than 25 “full-time equivalent” employees). The compa - ny granting EMI options must be independent (meaning that it must not be under the control of another company), and it cannot undertake cer - tain specified activities (such as dealing in land). It is possible to obtain advance assurance from HMRC that a company qualifies. The benefits of an EMI share option scheme include the following. • No income tax or National Insurance is due on the granting of an EMI option. • If the exercise price is at least equal to the actual market value of the shares under option at the date of grant, which can be
agreed with HMRC, no income tax or national insurance is payable on the exercise of the EMI option. • If the exercise price is less than the market value, the difference will be chargeable to income tax, and potentially National Insur - ance at exercise. • If the employee has held the option and/or the shares for more than two years, Business Asset Disposal Relief on CGT is available on the disposal of the option shares. Business Asset Disposal Relief reduces the rate of tax to 10% on the first GBP1 million of gains. CGT will then apply at 18% or 24% (depend - ing on the individual’s personal tax rate) for gains over GBP1 million (where gains are defined as the difference between the market value of the shares on exercise and the sum received on sale). Employees must own less than 30% of the company in order to participate in the scheme. The maximum value of shares over which an employee can hold EMI options at any time is GBP250,000. Once this limit has been reached (for which purposes, options exercised and lapsed are included in the calculation), no further EMI options can be granted within a three-year period. The EMI option scheme is extremely flexible in that the company is able to set any vesting and exercise terms it considers appropriate. This allows for options to become non-forfeitable based on a vesting schedule, and the exercise of options can be restricted to exit events, which may be full exits by shareholders or where there is an opportunity of a secondary sale. The above tax benefits will apply whenever EMI options are exercised.
600 CHAMBERS.COM
Powered by FlippingBook