If you’ve decided to award time-based or performance-based EMI options – see ‘What are the different types of EMI options?’ – employees will, by paying the exercise price, become shareholders in your company.
If a business sale or other exit event happens soon, then these employee shareholders will sell their shares along with the rest of the shareholders. In an exit, you wouldn’t need to think about employee shareholders.
If an exit is not being pursued, for instance because an expansion strategy is being followed by the company, you’ll want to consider whether there are any issues in having employee shareholders in the longer term.
Employee shareholders have limited rights
Before awarding time-based or performance-based EMI options, you’ll need to be comfortable with employees owning shares in your company. If you don’t want employees owning shares unless an exit is imminent, then these types of EMI options won’t be appropriate and you should consider issuing exit only EMI options – see ‘What are the different types of EMI options?’
Our experience, however, is that employers don’t have issues provided the employee shareholding is relatively small. That should be the case if the option pool is the usual size (ie 5 to 20% of the share capital) – see ‘What is an option pool and how big should it be?’
An EMI valuation should be carried out if EMI options are exercised by leavers
When a leaver’s option is exercised, the shares are usually valued for EMI purposes at the time so that any capital gain can be accurately calculated to when the shares are later sold. A formal valuation isn’t usually required on the exercise of exit only EMI options (as there is generally an observable exit price).
Think about what to do about leavers who holds shares
You will want to think about what to do about employee shareholders who leave the company. You might want to deal with leavers on a case-by-case basis at the time. You might be okay with leavers just keeping their shares, but you’ll probably want to add a restriction on the shares preventing sale to competitors. We will mention this to you as a part of setting up your EMI option scheme.
Make sure employee shareholders can’t block a sale
If a sale of the business occurs, you will want to make sure that employee shareholders and any other minority shareholders can’t block the transaction by holding onto their shares. They can be made to sell their shares to the buyer along with the majority shareholders by adding a ‘drag-along’ provision to the articles of the association of the company. As part of our services on setting up the EMI option scheme, we will assist you with this.
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Please Note: This article contains general information only and Simply Equity is not, through this article, issuing any advice, be it legal, financial, tax-related, business-related, professional or other. This article is not a substitute for professional advice and should not be used as such. Simply Equity does not assume any liability for reliance on the information provided in this article.