In a recent episode of our Stock 'N Roll podcast, Optio's CEO, Christoffer Herheim, sat down with equity compensation expert Veronika Lipinska of BDO to explore the UK's EMI share option scheme. They discussed what makes EMI the gold standard for equity, how to stay on the right side of the qualifying rules, and the recent reforms that let plans run longer and reach more people.
Ask any UK founder how to hand employees a real stake in the business, and one scheme comes up first. EMI options are the most tax-advantaged way to deliver equity to UK employees, and recent reforms have made them reach further than ever. In this episode, BDO's Veronika Lipinska breaks down what EMI is, the one rule you cannot afford to get wrong, and the real cases where a plan quietly falls apart. Listen to the episode to hear how to build a scheme that survives all the way to exit.
"EMI options, EMI scheme: that's the gold standard when it comes to equity." That is how Veronika Lipinska, a director in BDO's Share Plans and Incentives practice, opens the conversation.
What makes EMI the gold standard?
EMI stands for Enterprise Management Incentive, though almost no one says the full name. At its core it is a share option: a right to acquire shares at a future date. Left unstructured, that right carries a heavy tax bill in the UK. For a top-rate taxpayer, a non-EMI option can attract up to 47% on exercise, made up of 45% income tax and 2% employee national insurance, before you count the employer's own 15% national insurance on top.
EMI rewrites that maths. There is no income tax when the option is granted, and where the option is held for at least two years, the gain can qualify for Business Asset Disposal Relief, taxed at 18% rather than income rates. For the company, a qualifying EMI option means no employer national insurance when the option is exercised. "You get a tax saving when you get to exercise your option in a way that makes you as an employee benefit, and the employer company also benefits," Lipinska explains. Tax treatment can always change, so treat the rates as a snapshot, but the direction of travel is clear: EMI keeps far more of the gain in the hands of the people who earned it.
What is the one rule founders cannot get wrong?
"If you're setting up a brand-new EMI plan, design it really carefully and make sure you meet all the qualifying criteria on grant," Lipinska says. The trouble is that mistakes rarely show up when they are made. They surface years later, during a transaction, when the plan crystallises and the diligence begins. "You see what you've done wrong at the outset," she notes, "and often it's when you're going through a transaction." The most common failures she sees fall into a few buckets:
- Granting to the wrong people: non-executive directors, consultants, and anyone not on the payroll do not qualify, even if everyone assumed they did.
- A non-qualifying trade: some activities are excluded outright, and the problem only becomes visible at the point of sale.
- A disqualifying structure: for the longest time, a single overseas subsidiary, a Dubai entity for example, could rule a company out completely.
The safeguards are straightforward. Check that both your trade and your structure qualify, grant only to eligible employees, and take advance assurance from HMRC before you grant. It also helps to understand what a qualifying company looks like. EMI options must sit in an independent company, one that is not controlled by a corporate. There is no age or maturity requirement, so a brand-new startup and a ten-year-old business are on equal footing. And you do not have to grant in the entity people work in: it is perfectly possible to run the scheme over holding company shares, provided they are ordinary, non-redeemable, fully paid-up shares, while your people sit in a UK subsidiary. As Lipinska puts it, EMI is "such a flexible scheme."
How should you set the strike price and the valuation?
Because EMI is an option, it needs a strike price, but the legislation sets no minimum. You can grant as high or as low as you like, which is not true of every UK scheme. Grant at market value and all the growth becomes a capital gain, the cleanest outcome. Grant below market value and you get a mixed result: income tax up to market value, capital growth above it. Crucially, going below market value does not turn the whole gain into income, only the discount.
The subtlety is what "market value" means. A tax valuation is not a commercial valuation, and the two are usually far apart. "Tax valuations tend to be a lot lower," Lipinska says, and in the UK you can ask HMRC to approve the figure for EMI purposes. "Don't get scared if you see that it's really low, because it's a different methodology to your commercial one." That gap has a practical edge when you are hiring. Telling a candidate they are getting "50 grand of options" invites an obvious question: 50 grand at what value? Be clear which number you mean, pitch it honestly, and let people share in the upside at the lowest defensible entry point rather than blurring the two figures.
What has changed, and why does it matter now?
For years the main criticism of EMI was that it ran out too quickly for fast-growth companies. A plan was built to crystallise within ten years, but a European tech company now takes 13 years or more to list, if it lists at all. Deep-tech and capital-intensive businesses, cycling through Series C, D, and E, could watch a plan expire before the exit ever arrived. Two reforms have addressed that head on:
- Longer life: options can now run for 15 years instead of 10, closer to the Australian standard, so a plan does not lapse before the exit lands. People can still exercise earlier; the options simply live longer.
- More people: the employee limit has risen from 250 to 500 full-time employees, measured at the grant date, so exceeding it later does not disqualify options already granted.
A couple of details are worth holding onto. The test uses full-time equivalents, so a workforce with many part-timers can sit lower than a headcount suggests. Lipinska recalls a labour-intensive pub chain that came in under 250 on that basis alone. And documentation matters more than founders expect. Record your employee numbers and gross assets at the point of grant, so that if a deal ever puts the plan under the microscope, you can show plainly that you were inside the limits.
What happens when your people move across borders?
EMI is only tax-efficient while the holder is UK tax resident, so international moves need care. Someone relocating to the US lands in the 409A deferred compensation regime, and an unprotected option can lose its UK treatment and pick up US charges instead. That, Lipinska warns, is "the worst out of all the worlds." Take advice before the move: it may be worth exercising, or accelerating vesting, to shield the option first. It cuts both ways, too, as a US ISO holder arriving in the UK enters an entirely new regime.
Tax is not the only consideration. Weigh social security, which can be a real burden on top, and even old commitments like student loans, which do not simply disappear when you leave. The headline lesson is a useful one for anyone reading a shiny relocation offer: a 10,000-pound raise can cost more than it pays if it strips the favourable treatment off options that are already deep in the money.
What if you do not qualify for EMI?
Even after the reforms, some companies remain outside EMI, and there are good alternatives. Financial services firms still cannot use it, so fintechs typically turn to CSOPs, another tax-advantaged option with looser qualifying criteria. Companies under controlling corporate ownership have a different path: a private equity house taking 49% leaves a company independent, but once it crosses 50% the door to EMI closes. Those businesses reach for growth shares, sometimes called freezer, flowering, or hurdle shares, which are also well suited to more mature companies. And the familiar US instruments, RSUs and RSAs, remain popular where they fit.
Where does EMI quietly fall apart?
Two failure modes stand out, and both are avoidable. The first is granting too close to an exit. If there are already arrangements to sell the shares under option, those options may not qualify as EMI, and the result is a large payroll liability landing on the transaction. The two-year hold needed for the best rate is itself a reason not to rush; it used to be one year, and was doubled precisely because companies were granting at the last minute to catch a deal.
The second is change after grant. Amend a plan, or let the business shift underneath it, and you can disqualify the scheme. Lipinska tells the story of a fintech that qualified for EMI and then acquired a bank, an excluded activity. Unbeknown to the employees, who had simply got on with their jobs, the acquisition triggered a disqualifying event. "It's a brilliant achievement for the business," she says, but people's gains were disqualified, there was nothing in the option agreement that had ever foreseen it, and no one was compensated. The takeaway is to build for change. Performance conditions and double triggers can work well on EMI, but every amendment walks on thin ice, so plan for the scenarios you hope will happen.
Why do these schemes matter beyond the cap table?
There is a common assumption that options retain employees. The data points the other way. "If you're already an employee, you will not stay" for the options alone, Lipinska says, but the offer of salary plus equity genuinely sways people at the door. Options are a hiring tool first. Zoom out and the picture becomes national policy. The UK government is broadly supportive of employee ownership, and with a growth agenda, stubbornly low productivity, and fewer than 10% of households holding equity, schemes like EMI are how a high-tax jurisdiction makes ownership worthwhile.
The logic is that engaged owners are more productive, and growth companies competing against larger, safer, better-paying employers need something to pull the best and most risk-willing talent toward them. That is where a well-designed plan earns its keep, and arguably creates more value for a country than it costs in tax forgone. It is also why other markets are watching. From a Scandinavian vantage point, the UK's 500-employee limit and sub-20% rates look like a benchmark to aim at rather than a given.
To hear the full conversation, listen to the Stock 'N Roll podcast episode. If you're weighing up an EMI plan or checking that yours still qualifies, get in touch with the experts at Optio Incentives today.
"Please note: This podcast content is for informational purposes only and is not intended as professional advice. Always consult qualified legal, tax, and financial advisors for guidance specific to your situation."
Stay tuned for more episodes of Stock 'N Roll as we continue exploring the world of equity compensation: from theory to practice.
