EMI schemes are often used by small fast growth companies to help recruit, motivate and retain employees. But what happens when an employee leaves? RM2, the employee share scheme specialists, have identified 5 key things to consider before setting up your plan.
1. Options or shares?
An option is not the same as a share. An option is a promise to your employees that they can buy a share in the future at a fixed price. If your employee leaves before they’ve exercised the option, the option can simply lapse (subject to the EMI rules) – effectively, the promise is cancelled and the options go back into the pool for new hires.
However, if employees own shares and/or have exercised options and bought shares, arrangements will have to be made to buy or take the shares back. And it will need to be covered in the articles of association. Remember you’ll need to consider what to do if someone leaves in difficult circumstances.
2. Should leavers lose our completely?
Arguably, in a private company, there is little purpose in ex-employees retaining options (or shares) after they’ve left. From a practical perspective, too, it’s an administrative burden to keep track of ex-employees, particularly if you’re going through a fundraising or sale.
Also think about how big the option pool is. Do you have scope to let ex-employees keep options/shares if it reduces the pool for future key hires?
That said, if an employee has done a great job for a number of years, should they retain some benefit for that? And what if they leave for reasons beyond their control?
3. Are leavers good or bad?
Bad leavers are usually employees who leave in difficult circumstances (ie due to poor performance, misconduct, etc.) or to move to another job, and all their options lapse.
Good Leavers are usually employees who leave for reasons beyond their control – eg they are made redundant, or become too ill to work, or die, and they or their next of kin may be able to keep some or all of their options.
You can decide how to treat leavers with an EMI scheme. You can also give the board of directors discretion as to who to treat as good or bad. But board decisions need to be reasonable and consistent, and there needs to be a record of how and why they exercise their discretion.
4. Performance conditions and vesting
EMI options also often have conditions attached:
- time based – with options vesting, say, every year over a 4 year period; and/or
- performance targets – for example, options vesting on the achievement of certain sales or EBITDA targets each year.
So, for example, if an employee leaves after 2 years and has a 4 year vesting schedule, they could keep 50% of their options, provided they’re not a bad leaver.
5. How long can a leaver keep their options for?
If they can keep EMI options, leavers must exercise them within 90 days of leaving to get the beneficial tax treatment. Otherwise the tax benefits are reduced (unless the employee has died, in which case it’s 1 year). So you might want to allow good leavers to exercise their options (becoming shareholders) before an exit event. However, you need to weigh up the pros and cons of this, ie whether it is commercially and/or administratively appropriate.
If you would like to discuss setting up an EMI Share Scheme or would like further advice on setting up a scheme you can get in touch with RM2 on enquiries@rm2.co.uk
