How Enterprise Management Incentives Benefit Your Startup
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- How Enterprise Management Incentives Benefit Your Startup - July 23, 2016
The battle to recruit and retain top talent is fierce on a global scale. As an early stage company looking to grow, it can be a challenge to encourage proven, experienced professionals to work for you and take the business forward. At a time when cash is understandably tight for startups, business owners are becoming increasingly creative by implementing Enterprise Management Incentives (EMI) that are a cost-effective, tax-efficient way of attracting and motivating top-quality talent.
An EMI scheme gives an employee the right to purchase shares in the company in the future at a price that is fixed now. It’s the perfect incentive for professionals working for a startup business because if the value of the shares escalates during employment, they could make substantial capital gains when they opt to sell their shares in the future.
Employees can feel part of the same startup journey
What’s exciting about EMIs as a concept is that it gives employees the opportunity to experience the same journey as the founders themselves; profiting from the long-term success of the company and enjoying significant tax advantages in the process. Employees that opt in to an EMI scheme do not have to pay the level of income tax that they would normally be required to on the market value of any shares or options given to them.
Income tax benefits for employees
An approved EMI scheme means employees are only charged 10 percent capital gains tax on the increase in value over what they paid for the shares – providing that price is at or above the market valuation of shares on the date they received the options.
Incentivize staff without affecting your cash flow
Employees that buy in to an EMI scheme will feel immediately incentivized, having been given a bonus of highly lucrative potential without affecting the cash flow of the company itself. With a vested interest in the long-term success of the startup they work for, employees within an EMI scheme will feel empowered to treat the business like it’s their own: their previous downtime and extended coffee breaks will, all of a sudden, seem counterproductive in their quest for capital growth!
Chris Lee, our EMI expert at Goringe Accountants, said:
“The EMI scheme itself acts as the pot of gold at the end of the rainbow for employees, as these schemes can make people large sums of money with minimal cost to the business.”
Certainly, EMI schemes are most effective with fast-growing and exciting companies, assisting with employees buying into the management vision. The danger is that if growth across the company itself is slow, then an EMI scheme can become ineffective at improving a company’s success.
We’ve worked closely with a number of fast-growing startups to provide consultancy over the implementation of an EMI scheme.
One of the most notable success stories from our recent client portfolio is a foreign exchange software development startup company based in London. The company’s new EMI scheme was designed around an early steep growth curve, with potential payouts upwards of £500,000 to individuals who worked with the company from the ground up – a substantial financial reward.
Performance-related milestones keep staff engaged
Further to the final pay-off goals of EMI schemes, employers can incorporate performance milestones. These act as goal posts to keep employees focused on achieving results one step at a time. This certainly helps to sustain employee motivation over the long term, as an end goal can be forgotten about over the years it may take for a company to grow substantially.
EMI options enable startups to retain top talent as well as recruit it, too. Exit only share options tie employees in to the company so that they only become shareholders immediately prior to the sale of the company. For some business owners, this eases concerns that they may lose control over the business as a result of allocating shares to employees.
Enterprise management incentives provide taxable benefits for employers
A final point to note is that EMI schemes have an added benefit for businesses themselves being able to receive tax deductions when the employees decide to exercise their EMI options. These savings are a corporation tax deduction based on the difference between the option exercise price and the market value of shares at the date of option exercise. Employers also benefit from not having to pay National Insurance Contributions (NICs).