Giving employees a meaningful stake should not create avoidable tax exposure, ownership disputes, or a difficult conversation with investors later. Both EMI options and growth shares can share future value, but they do so in materially different ways.
For UK SMEs, Growth Share Valuation is often the point where a good intention becomes a properly documented incentive plan. HMRC rules, employee eligibility, the value already held by founders, and the underlying share rights all matter. The right structure starts with the commercial facts.
Key Takeaways
- EMI options give qualifying employees a right to acquire shares later, usually without payment at grant.
- Growth shares are issued upfront and normally participate only in value above an agreed hurdle.
- EMI is often the cleaner tax route for eligible UK trading companies, subject to strict HMRC conditions.
- Growth share tax treatment depends heavily on share value, restrictions, subscription price, and section 431 elections.
- A defensible valuation protects existing shareholders whilst keeping the employee reward credible.
Growth Shares and EMI Options: How the Two Incentives Work
An EMI option is a contractual right to buy shares in the future at a fixed exercise price. The employee does not own shares at grant. They become a shareholder only when they exercise the option, pay the exercise price, and receive the shares.
Growth shares are actual shares issued at the outset. Their rights are designed so the holder benefits only after the business exceeds an agreed value hurdle. This can protect the value already built by founders and investors.
Consider a UK software company worth £4 million today. It may issue growth shares that only share in value above £4 million. If the company sells for £10 million, those shares can participate in the £6 million of growth, subject to their rights and percentage holding.
EMI options could instead allow an employee to buy ordinary shares later at an exercise price based on the share value at grant. The commercial destination may look similar. The legal route and tax treatment are not.
EMI options give qualifying employees a future right to buy shares
EMI is a statutory, tax-advantaged option scheme for qualifying employees of eligible trading companies. There is normally no payment when the option is granted. The employee holds an option, not voting rights, dividend rights, or a place on the register of members.
The company must meet defined conditions. It must have gross assets of £30 million or less, fewer than 250 full-time equivalent employees, and carry on a qualifying trade. Certain activities, including much financial services, property development, and legal services work, can prevent eligibility.
Employees must normally work at least 25 hours each week or spend at least 75% of their working time with the company. They must also meet limits around material interests. An individual can generally hold EMI options worth up to £250,000 at grant, subject to the scheme rules.
The option agreement, board approvals, valuation, grant process, and HMRC reporting must be correct. A good EMI scheme is documented before options are issued, not repaired after the event.
Growth shares reward only the value created above a hurdle
Growth shares are a separate class of shares, often with restricted rights. They may have limited votes, no dividends until a threshold is met, and detailed provisions for a good leaver or bad leaver.
The participant becomes a shareholder on issue. They usually pay a subscription price, even if that price is low because the shares have little current value after the hurdle and restrictions are considered.
Growth shares can reward employees, directors, and, depending on the facts, advisers or consultants. They are useful where EMI is unavailable or where existing shareholders need a more tailored protection of current value.
The tax position is less prescribed than EMI. Market value, the articles of association, the subscription documents, and the participant’s employment status all affect the result.
The Key Differences Between Growth Shares and EMI Options
The practical comparison is set out below.
| Issue | EMI options | Growth shares |
|---|---|---|
| Legal ownership | Employee owns an option until exercise | Holder owns shares from issue |
| Company eligibility | Strict statutory conditions apply | No EMI-style size limits |
| Upfront payment | Usually none at grant | Subscription price is normally paid |
| Existing value | Exercise price can reflect current value | Hurdle can ring-fence current value |
| Tax framework | Statutory HMRC regime | Depends on valuation and structure |
| Control | No shareholder rights before exercise | Rights apply immediately, subject to class terms |
| Administration | Formal grant and HMRC reporting | Bespoke legal, tax, and company law work |
| Flexibility | Strong where the company qualifies | Strong where a bespoke hurdle is needed |
EMI is often the preferred route when the company qualifies and the recipient is an eligible employee. It is familiar to investors and can provide a clear route to capital gains tax treatment on a future disposal.
Growth shares are often the better fit where EMI cannot be used, the recipient is not eligible, or founders need the reward to start only above a defined business value. Tax rules can change, so the final position should be checked before implementation.
Tax, valuation, and HMRC treatment are not the same
EMI is a statutory scheme. There is usually no Income Tax or National Insurance at grant. There is also normally no charge on exercise where the exercise price is at least the agreed market value at grant and the relevant conditions are met.
A properly structured growth share issue may also avoid an immediate Income Tax charge, but there is no automatic result. If shares are issued below their unrestricted market value, the discount can create employment income and National Insurance exposure.
A section 431 election is often considered for employment-related growth shares. It is made jointly by the employer and employee, normally within 14 days of acquisition. The election can prevent future value linked to restrictions being taxed as employment income, but it must be supported by a sound valuation.
A low subscription price is not proof that growth shares have low market value. The hurdle, restrictions, exit rights, and company prospects must support the figure.
For EMI, the HMRC EMI valuation service is central to setting an evidence-backed exercise price. The valuation should address both actual market value and unrestricted market value where relevant.
Ownership, control, and employee experience can change the outcome
Employees often see “shares” and assume they will receive a sale payment. That assumption may be wrong. A growth share may have no dividend rights, limited votes, compulsory transfer provisions, and no value unless the hurdle is exceeded.
EMI option holders face a different issue. They may need to exercise before a deadline, particularly after leaving employment or during a sale. If they do not exercise, they may lose the opportunity.
Good leaver and bad leaver rules need plain-English explanation. So do dilution, future funding rounds, drag-along rights, and what happens if the business does not reach its plan.
A credible scheme explains both sides: the potential reward and the real possibility that the shares or options become worthless.
How Growth Share Valuation Helps You Choose and Set the Right Structure
A Growth Share Valuation is not simply a valuation of the company as a whole. It also considers the rights attached to a particular class of shares. A minority share with a hurdle, transfer restrictions, and limited dividends may be worth far less than its percentage of the headline enterprise value.
The hurdle, subscription price, exercise price, and proposed allocation of future upside should all be supported by evidence. Otherwise, the plan may either give away too much value or fail to motivate the people it was meant to reward.
A proper review will usually consider recent accounts, management figures, forecasts, the cap table, articles of association, plan rules, funding documents, recent share transactions, and commercial risks. The valuation method may use normalised earnings, EBITDA multiples, comparable transactions, or discounted cash flow.
Set the hurdle and exercise price using real business evidence
Suppose a company is valued at £5 million and issues growth shares with a £5 million hurdle. A holder with 5% of the growth pool receives nothing at a £5 million exit. At an £8 million exit, they participate in the £3 million value above the hurdle, subject to the share rights.
That protects the founders’ existing £5 million value. It also gives employees a clear reason to care about future growth.
For EMI, the exercise price is linked to the market value agreed at grant. Setting it too high makes the option unattractive. Setting it without evidence creates tax risk. The analysis must consider current trading, forecasts, dilution, likely exit terms, and the restrictions attached to the shares.
Use a practical decision checklist before issuing equity
Before issuing equity, founders should confirm the following:
- Check whether the company, trade, and recipients qualify for EMI.
- Decide who should receive equity and what behaviour the award should reward.
- Review voting rights, dividend rights, future funding, and expected exit timing.
- Confirm whether participants can afford a growth share subscription.
- Agree leaver provisions, tax treatment, reporting duties, and employee communications.
- Put valuation work, board approval, legal documents, and HMRC reporting into one coordinated process.
Consult EFC can support the valuation and accounting work needed to make that process factual, documented, and fit for scrutiny.
Frequently Asked Questions
Can an employee receive both EMI options and growth shares?
It may be possible, but the interaction needs careful review. The company must consider dilution, tax treatment, share rights, EMI limits, and what happens to each award on a funding round or sale. The documents should state which award takes priority where rights overlap.
Do growth shares always create a tax charge when they are issued?
No. The outcome depends on the market value of the shares and the price paid by the recipient. A discount can create Income Tax and National Insurance exposure, whilst a properly supported market value subscription may avoid an immediate charge.
What happens to EMI options when the company is sold?
The sale documents and option plan may require options to be exercised, exchanged for replacement options, or cancelled for cash. Employees need enough information and time to decide whether to exercise. The tax position also depends on the transaction terms and whether EMI conditions have been maintained.
Can growth shares be used if a company is too large for EMI?
Yes. Growth shares do not have the same statutory gross asset and employee-count limits as EMI. They still require careful valuation, company law work, tax analysis, and shareholder agreement provisions.
Who owns the shares if an EMI option has not been exercised?
The employee normally owns the option, not the underlying shares. They usually have no voting, dividend, or shareholder information rights until exercise, unless the company documents provide otherwise.
Why should a founder obtain an independent valuation?
An independent valuation supports the EMI exercise price or growth share hurdle. It can reduce disputes between founders, employees, investors, and HMRC. It also gives the board a documented basis for balancing founder protection with a meaningful reward.
A Clear Choice Starts With the Numbers
EMI is often the cleaner and more tax-efficient choice for an eligible UK SME rewarding employees. Growth shares can be a flexible alternative where EMI is unavailable or the business needs a bespoke hurdle above existing value.
The headline structure is only the start. Growth Share Valuation, share rights, leaver terms, tax checks, and reporting must work together.
Before issuing shares or options, speak with Consult EFC about preparing a clear, evidence-backed valuation that supports the decision.
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Over 12 years across Big Four audit, Investment Banking and corporate advisory. Kishen works with UK SMEs on valuations, exit planning, fundraising and financial strategy. ICAEW regulated. Big Four trained. Based in London.