- JPP Law cautions that common EMI errors can result in startups losing tax advantages on a permanent basis
- Problems around share class eligibility, regulatory compliance and leaver terms are regularly identified during due diligence reviews
- Changes to EMI thresholds mean founders should review existing schemes before making new grants
According to JPP Law, a commercial law firm working with startups and scale-ups across England and Wales, many founders are still underestimating the legal complexity of Enterprise Management Incentive (EMI) schemes, leading to avoidable mistakes with serious tax consequences.
While EMI options continue to be one of the most effective tools for aligning and incentivising employees without draining cash reserves, the rules governing their operation are highly technical and frequently misunderstood.
“We regularly see EMI schemes unravel not because founders are careless, but because they underestimate how technical the rules really are,” said JP Irvine, a commercial lawyer and option scheme expert for JPP Law. “By the time a problem comes to light, the tax benefits are often already lost.”
Through its work assessing and repairing EMI schemes, JP Irvine highlights several recurring areas of risk that founders should address before issuing options or relying on existing arrangements.
1. Using “full-strength” ordinary shares instead of a tailored employee share class“A lot of founders reach for ordinary shares for their employees because it feels safe, familiar and consistent. But this is not the smartest move in the Founders’ Playbook. The problem is that ordinary shares usually hold full voting rights, dividends and wide information rights. That means they tend to have a higher market value, which drives up the option exercise price – and ends up costing your employee more in the pocket!
“A more practical route is to create a lighter share class specifically for employees. Removing rights that staff don’t need at an early stage often results in a much better option-valuation, which makes the exercise price more appealing and keeps the structure cleaner (votes to those who need them, no votes to those who don’t).
“Before you create a new share class, please take legal advice from a qualified corporate lawyer, rather than an automated bot, AI, a platform, or non-lawyer.
“When this is planned properly from the start, it normally leads to a far better long-term structure, happy staff and an option scheme that actually works and pays out properly for the employee shares upon exit.”
2. Treating EMI as a “one and done” project – WRONG!
“It is very common for companies to draft the documents, sign the option agreements and send them to employees, thinking it is done and dusted. No – every employee must sign and return within the allotted deadline, annual reporting must take place by 6 July every year, and individual option grants must be reported too OR ELSE EMI status will be lost, and all your hard work wasted.
“You need a clear system for tracking options granted, making HMRC filings, paying exercise prices, issuing employee shares, updating Companies House and meeting deadlines. Set timers, diary notifications or whatever it takes to keep those dates in sight, because once an EMI falls out of compliance it is very hard to repair the damage.”
3. A common mix-up – vesting vs exercise
“Vesting and exercising are often spoken about as if they are the same thing, and they’re not. Vesting is quite akin to the concept of earning. The vesting date is the date when the employee has earned the right to exercise the option, subject to all other terms and conditions of the option agreement being satisfied. Even after vesting, the option holder is still an option holder – they do not own shares at that stage.
“Exercise is a separate step. It is the moment the employee actually acquires shares and becomes a shareholder – often by paying the exercise price (or by using whatever payment mechanism is allowed). Only after exercise do those shares form part of your company’s official share capital.
“We still see companies describing employees as shareholders when their options have only vested.That kind of confusion can cause real problems later on.”
4. In sync – keeping your option scheme, Articles and Investor Agreements aligned
“Like a Jigsaw, your EMI scheme “pieces” should fit within your existing company framework seamlessly. Problems appear when companies grant options that clash with their Articles of Association or their shareholder agreements, or if employee option contracts or if equity promises made to employees are broken through miscommunication or mistake.
“We have seen broken share capital tables and incorrect share option documents wreck the prospect of a company sale and wreck the goodwill between owners and employees. A share option scheme is meant to enhance goodwill, not destroy it.”
5. When it’s time to say goodbye – leaver terms and exits
“Leaver terms are another area where startups often fall short. These provisions govern what happens to options when an employee leaves, whether through resignation, dismissal, illness or death.
“Without clear rules on vesting cut-off points, exercise windows and exit treatment, disputes can quickly crop up. Matters become even more complex if an employee has exercised options and holds shares at the time of a sale.
“If an employee holds even one single share at the time when the Company sells, his or her rights must fit with drag-along, tag-along and warranty arrangements.
“Remember, they will also be a shareholder selling part of the company and will logically see and sign the share purchase agreement you are negotiating.”
6. EMI thresholds are changing, and founders must take note
“Recent Budget changes have expanded EMI thresholds from April 2026, increasing limits on employee numbers, gross assets and the total value of options that can be granted.
“While these changes give growing companies more flexibility, JPP Law warns that founders close to existing thresholds should review their position carefully before launching or expanding an EMI scheme.
“The threshold changes are helpful, but if a company is close to the limits, decisions around hiring, fundraising and option grants can affect EMI eligibility faster than founders expect.”
