EMI Growth-Share Options: Incentivising a Senior Sales Hire

EMI Growth-Share Options: Incentivising a Senior Sales Hire

The shareholders of an owner-managed company were bringing in an experienced sales lead to grow profits and take the business towards an exit. They wanted him properly incentivised, but only on the value he helped create. This is how our team designed and implemented the scheme.

At a glance

• Client: the shareholders of an owner-managed company worth £5m
• Aim: reward a senior sales hire for growth, without giving away the value the shareholders had already built
• Structure: a new class of growth shares sharing only in exit proceeds above a £5m hurdle, with Enterprise Management Incentive (EMI) options over those shares, exercisable on exit
• HMRC: the valuation agreed with HMRC Shares and Assets Valuation before grant
• Result: the shareholders kept all the value up to £5m, and the sales lead has a tax-advantaged option over the growth that follows

The client

The client was the group of shareholders in an owner-managed company. They were hiring an experienced sales lead to grow profits and move the business towards an exit.

The challenge

The shareholders wanted the new hire properly incentivised, but only on the value he helped create. The company was worth £5m, so he should take part in growth above that figure on exit, and not in what the shareholders had already built.

The scheme also had to qualify for EMI, be valued correctly and be in place early enough to motivate him from the start of his role.

What we did

• Designed the structure. We created a new class of growth shares that participate only in exit proceeds above a £5m hurdle. Tax-advantaged EMI options were granted over those shares and are exercisable on exit.
• Confirmed that the company and the individual qualified for EMI. We checked the gross assets and employee limits, the trading requirements and his working time commitment.
• Agreed the valuation with HMRC. We agreed the value of the growth shares with HMRC Shares and Assets Valuation before grant, and set the exercise price at that value.
• Set out the terms in one term sheet. The commercial terms and the tax requirements went into a single document, which the solicitors used to draft the articles and the option agreement.
• Ran everything from one timetable. The rolling agenda tracked each piece of work: the qualifying checks, the valuation submission, the legal documents and the grant. It covered the client, the solicitors and the HMRC notification after grant. Because the work was tied to one timetable, the options could be granted as soon as HMRC agreed the valuation, so the sales lead was incentivised from the start of his role.
• Worked through the valuation on screen with the client. Getting the information needed for the valuation was hard, particularly on exceptional items. After a couple of emails, we arranged a call and went through the valuation with the client on screen.

The outcome

• The scheme was implemented with HMRC's agreement to the valuation.
• The shareholders kept all the value they had built up to £5m.
• The sales lead has an option to participate in the growth he delivers, with no income tax on exercise and, on a sale, gains taxed as capital.

Why it matters

An incentive for a key hire does not have to dilute what the existing owners have built. A hurdle on the growth shares limits the new hire to future growth, and EMI options give him a tax-advantaged way to share in it. Agreeing the valuation with HMRC before grant gives both sides certainty on the price at which the options are set.

To explore how this fits with your own plans, see our page on exit planning, or book a call with our team.