How software startups can use an EMI scheme to attract top talent

A struggle for businesses, not least startups, is attracting top talent. With the rise of remote work and booming growth in the tech sector, the software industry in particular is finding it difficult to find the right people for the job.

The concept of working for a startup is an attractive proposition, but with it comes an element of risk. Typically, salaries aren’t as competitive as you might expect from more established companies, and benefits packages aren’t nearly as compelling. Can you rely on the assurance of future business growth or the promise of a great software idea to attract the kind of talent you need?

The concept of employee share options

Equity participation is quickly becoming the ‘sweetener’ when it comes to making compensation more attractive to tech talent. When you’re a startup, you just cannot match the spiralling six-figure salaries offered to senior engineers, developers and CTOs from the likes of FAANG (Facebook, Amazon, Apple, Netflix, Google).

Instead, enterprise management incentives, or EMI schemes, are offering not just shares at a fixed price (which are acquired in the future), but significant tax benefits to the company and the individual.

Who qualifies for an EMI scheme?

There are several requirements here, and surprisingly, the EMI scheme isn’t just aimed at fledgling startups. It also welcomes some pretty sizable organisations. We won’t delve into every single piece of detail, but here are a few of the basics:

• You must be an independently trading company
• Your gross assets must not be greater than £30m
• Your full-time employee headcount must be lower than 250
• Your participating employee must be working at least 25 hours per week…
• …and they are limited to £250k worth of shares

What are the tax benefits?

The great news is that there are benefits to both parties. The employee won’t see any income tax or NI contributions taken from the receival of the shares. However, they will be charged capital gains tax on the increase in value, but only at around 10%. (Please talk to us further if you’d like some clarification here.)

Benefits for you, the employer, include the ability to deduct any costs associated with setting up and administering an EMI scheme, because it’s seen as an allowable expense. You can also apply for a pretty sizable corporation tax deduction, and this is typically the equivalent to the gains made by employees. This is hugely beneficial in bringing down that corporation tax bill and really does encourage growth and success at a business and recruitment level.

Communication is key

Whilst you may understand how an EMI scheme works, it could be the first time a potential employee has heard about such a thing, so it’s important to break it down into an understandable proposition that is neither intimidating nor confusing.

The ‘big sell’ to the talent is the potential value of the shares in months or years to come. It’s not unusual for employees to get lost in the jargon if the language in your recruitment process isn’t quite right. To make EMIs an effective retention tool, founders and hiring managers must understand the ins and outs as well as how to communicate it in an interview scenario. Candidates may well be sceptical if it’s their ‘first time’, and it’s on you as a business or business unit owner to help them understand the bigger picture. In turn, it’s on us as specialists to help you understand everything an EMI involves, from the big numbers to the granular details.

A huge part of what we do is providing solutions to business issues that help our clients sleep better at night, and we know that attracting and retaining top talent is one of their primary worries. Whilst we aren’t recruiters, we certainly understand the propositions and processes that can make recruitment more successful in the short and long term in your business.

If you’d like to know more about EMI schemes and how you can start to bake them into your senior software roles, get in touch with us today.

Any potential dangers?

It’s easy to focus on the positives, but it’s important to remember that business doesn’t always go to plan. It goes without saying that schemes like this, of course, depend highly on the success of the business itself. But are there any particular pitfalls to watch out for? We would advise that you pay careful attention to how your EMI scheme relates to your exit plan. Or specifically, if you’re focused too heavily on your exit plan.

Imagine that a buyer shows a great deal of interest in your business several years before you planned to sell or exit. If you were to choose to sell at this point, this could cause complications with employees who entered the EMI scheme with longer term shares in mind. For example they were expecting one share per year for five years, and you sell after two. Again, this is where communication is key and we would highly recommend consulting us to ensure your proposition is clear. In the worst case scenario, tax benefits may disappear entirely if agreements are broken or adjusted without due diligence from a tax specialist such as Wilson Partners.

So to recap, the EMI is a hugely beneficial scheme to employers and employees alike. When executed properly, the business will see corporation tax benefits and top talent being retained for the long-term. EMIs can also be a strong recruitment tool and drive interest amongst potential employees as this practice becomes more commonplace within software companies, and more understood by employees.

If you’re a software startup and you’re interested in firming up your recruitment proposition, then please do get in touch to learn more about EMI schemes and how they can solve your talent acquisition woes.