Enterprise Management Incentive (EMI)

mrbells

Enterprise Management Incentive (EMI) Think I may have posted this previously in wrong section, hope someone here can help.

I have recently been offered the opportunity to join an EMI scheme.

The basics of it being that I must meet a sales target each year to earn 1% of the company shares i.e hit 5 years, receive 5%, only hit 3 out of the 5 (consecutive or otherwise) and I get 3%...simples!

Well it would be if I understood the detail behind it. There seems to be an endless amount of information out there to advise the employer how to set up the scheme. However, there is nothing to advise the employee what to look out for, what questions to ask or otherwise.

I'm aware that at the point of receiving the shares, I am liable for a tax payment of sorts but not sure how much percentage wise, though I do believe it is calculated against the approved company valuation a the time of setting up the scheme.

As this is a scheme that offers additional financial benefits and a possible income via dividends, which I ordinarily would not have, I want to be careful not to bite the hand that feeds me. However, I do want to be armed with sufficient knowledge to ensure that I make full use of the scheme and to be able to negotiate the terms where possible.

If any one can shed more light or advise where I can find information, from an Employees perspective, it would be most appreciated.

Thank you.

Wywth

mrbells wrote: »

Enterprise Management Incentive (EMI) Think I may have posted this previously in wrong section, hope someone here can help.

I have recently been offered the opportunity to join an EMI scheme.

The basics of it being that I must meet a sales target each year to earn 1% of the company shares i.e hit 5 years, receive 5%, only hit 3 out of the 5 (consecutive or otherwise) and I get 3%...simples!

Well it would be if I understood the detail behind it. There seems to be an endless amount of information out there to advise the employer how to set up the scheme. However, there is nothing to advise the employee what to look out for, what questions to ask or otherwise.

I'm aware that at the point of receiving the shares, I am liable for a tax payment of sorts but not sure how much percentage wise, though I do believe it is calculated against the approved company valuation a the time of setting up the scheme.

As this is a scheme that offers additional financial benefits and a possible income via dividends, which I ordinarily would not have, I want to be careful not to bite the hand that feeds me. However, I do want to be armed with sufficient knowledge to ensure that I make full use of the scheme and to be able to negotiate the terms where possible.

If any one can shed more light or advise where I can find information, from an Employees perspective, it would be most appreciated.

Thank you.

Is the company a plc traded (via market makers) on the london stock exhange?

As they appear to be offering you as an individual a possible 5% it doesn't sound like a very big one, so AIM is about the only possibility (but risky) I would think.

Anything else, and the shares are only worth what someone is prepared to buy them ... and there may not be anyone interested in buying them at any price

What sort of shares are they? What types of shares has the company issued?

e.g. 5% of preference shares that only pay 1% of dividend of ordinary shares is pretty pointless.

mrbells

Wywth,

Thank you but you have me worried now. I have very limited knowledge of shares and how this will work.

The company is a private limited company, 1 Director and Company Secretary, who both currently own 50% of the shares. The only thing I can tell from Duedil is that each 50% is valued at £50, but I'm obviously aware that this does not reflect the value of business now.

I wouldn't be looking to sell the shares immediately, but rather take a dividend annually and as I understand, this is calculated as a % of the amount of net profit which is allocated to the divident pot.

Any further explanation or advice would be most appreciated.

Wywth

mrbells wrote: »

Wywth,

Thank you but you have me worried now. I have very limited knowledge of shares and how this will work.

The company is a private limited company, 1 Director and Company Secretary, who both currently own 50% of the shares. The only thing I can tell from Duedil is that each 50% is valued at £50, but I'm obviously aware that this does not reflect the value of business now.

I wouldn't be looking to sell the shares immediately, but rather take a dividend annually and as I understand, this is calculated as a % of the amount of net profit which is allocated to the divident pot.

Any further explanation or advice would be most appreciated.

Are you interested in investing your money into this business?
(If so, make sure it's on the same share class as the existing shareholders have)
And seek professional advice.

Or do you just want a job that earns you money that you can spend how you like? In which case, tell 'em.

mrbells

At this stage, I am not looking to invest in the business.

I am happy to commit myself to the business for the forseeable future, for which I will be granted 5% of the company shares after year 5, providing interim targets are met. Following this, I am happy to take a dividend on these shares to supplement my salary.

I'm pretty lost as far as share class is concerned. Are you suggesting the type of shares allocated to me would/could be different to those held by the director and company secretary? I do know at this stage that I would be granted voting rights, does this help?

My main concern is the cost for which I am liable at the time the shares are allocated and again when dividends are issued.

Thanks again.

paddyrg

Not all shares are born equal. Rather, they are born equal in the same class however there are different classes of shares sometimes issued. Just ask the director or the secretary if they are the regular normal shares that they currently own that they are offering to you. Most likely this is absolutely straightforward, one of them will drop to 45%, all nice and clear, but be sure. For instance what happens if they decide to go to the market for finance in those 5 years and sell off shares or release new ones (diluting your holding)?

You can be pretty confident the only money you'll see from the shares in s small company like this though is a dividend if you're lucky and they decide to pay one for themselves. If the director draws a big fat salary he may not need a dividend to get money out of the company (especially if related to the Secretary!), so may not bother to issue an expensive dividend. The memorandum and articles may specifically require that you can only sell the shares to other existing shareholders, for instance, so their open market value is nil.

I think it's a lovely idea to make you feel more a part of the business and sell more stuff. Personally, if there was an opportunity to be rewarded in cash as opposed to equity, I'd take that first though. I'm a 'bird in the hand' guy, there are many dozen I can now see in the bush having got there two at a time from previous promises! !

mrbells

I too thought it was lovely idea but the more I look into it, the more skeptical I am becoming.

It seems that I am investing a lot of my time and effort to increase revenue for a small business, whose Director and Secretary are guaranteed a handsome return, where my own reward is very much dependent on the future evaluation of the business and the hope that a healthy dividend is paid out to supplement my salary.

I guess this may be why there is so much advice available to the employer in respect of implementing such a scheme and not so much for the employee. Surely there should be a warning to employees regarding the potential risks!

I would still like to understand my liability as far as what taxes I will need to pay upon receiving the shares, what CGT I would have to pay if I sold them and what tax I would have to pay should I choose to retain the shares and take the dividends.

Thank you for all advice provided so far, any more would again be greatly appreciated.

cazziebo

Here's a useful fact sheet on EMI schemes, especially on tax liability.

You'll have a sense of how much the company is likely to grow so that should give you an indication as to increase in share value. If it's likely to be an attractive acquisition prospect you could be quids in.

I don't see many downsides but probably worth a conversation with an IFA.