How to Set Up an EMI Scheme: A Step-by-Step Guide for Founders

Once you have decided EMI is right for your company, the work shifts from the why to the how. This article is part of the Attracting Talent: A Guide to EMI Options and Employee Incentives series and sets out a realistic timeline for getting a scheme from a board decision to a notified grant, with the steps that founders most often underestimate flagged along the way.

It assumes you already accept the case made in Why EMI Options Are the Gold Standard for Startup Hiring, and it leans on the detail in How to Value Your Startup for HMRC Share Option Purposes for the valuation stage, which sits at the heart of the timeline. The aim here is to show how the pieces fit together and how long each one really takes.

How long the whole process takes

For a typical startup setting up its first scheme, allow four to eight weeks from decision to first grant. Most of that time is spent on two things: drafting the scheme documents and agreeing the share valuation with HMRC. Once the scheme exists and a valuation is in place, subsequent grants are far quicker, often a week or two each, because the framework is already built.

The single most common cause of delay is starting the valuation too late. Because the agreed valuation usually has a limited window of validity, founders sometimes leave it until a candidate is ready to sign, then lose time waiting for HMRC. Starting the valuation early in the process removes that bottleneck.

Stage one: confirm eligibility

Before spending money on documents, confirm the company and the intended recipients qualify. Check the gross-assets limit of £120 million, the fewer-than-500-employees test, the qualifying-trade condition, and independence. For each recipient, confirm the working-time requirement of at least 25 hours a week or 75 per cent of their working time, and that they do not already hold more than 30 per cent of the company.

This stage is quick when the answers are obvious but worth documenting, because the conditions are tested at the date of each grant, not just at scheme setup. A short eligibility note kept on file is useful evidence if the position is ever questioned.

Stage two: design the scheme

Scheme design is where the commercial decisions are made. You decide the size of the option pool, the vesting schedule, what happens on a leaver event, and the conditions under which options can be exercised. These choices shape how the scheme motivates the team, so they deserve proper thought rather than a copied template.

Setting the option pool and vesting

Most startups set aside an option pool of around 10 to 15 per cent of fully diluted equity. The market-standard vesting schedule is four years with a one-year cliff: nothing vests in the first year, 25 per cent vests on the first anniversary, and the rest vests monthly over the following three years. Investors expect to see this shape, and candidates benchmark against it.

Two further design choices deserve attention at this stage. The first is the leaver framework: deciding what happens to vested and unvested options when someone departs, and distinguishing good leavers from bad leavers in the rules. The second is the exercise trigger: most schemes for early-stage companies are exit-only, meaning options can only be exercised on a sale or listing, which keeps the cap table simple and avoids creating minority shareholders along the way.

It is worth keeping each individual within the £250,000 limit on the value of options held, and the company within the overall £6 million cap, when sizing grants. Designing the pool with these ceilings in mind avoids having to redesign the scheme once it starts to fill up.

Stage three: agree the valuation with HMRC

The exercise price of EMI options should equal the market value of the shares at the date of grant if you want the cleanest tax outcome. To fix that value with confidence, you submit a proposed valuation to HMRC's Shares and Assets Valuation team for agreement. HMRC reviews the methodology and figures and confirms a value, which is then valid for a defined period during which you can make grants at that price.

This is the stage that most influences the overall timeline, so it is covered in depth in the dedicated valuation article. The key planning point is that the agreed value has a limited shelf life, so you want grants to happen inside that window rather than letting it expire and having to start again.

Stage four: prepare and approve the documents

With the design settled and the valuation in hand, the scheme documents can be finalised. A standard EMI setup involves several pieces, and the board needs to approve them formally before any options are granted.

• EMI scheme rules: the overarching terms governing all grants.
• Option agreements: the individual contracts setting out each employee's grant, strike price, and vesting.
• Board minutes approving the scheme and authorising the grants.
• Shareholder approval and any required amendments to the articles of association, where the existing constitution does not already permit the scheme.
• An updated cap table reflecting the option pool.

Getting the documents right matters because errors here are the kind of thing that surfaces during investment due diligence, when the cost of fixing them is highest.

Stage five: grant the options

Granting is the point at which each employee signs their option agreement and the grant takes legal effect. The date of grant is significant: it fixes the market value used for the strike price, it starts the clock for Business Asset Disposal Relief, and it triggers the notification deadline. Record the grant date carefully for every option.

Stage six: notify HMRC of the grant

EMI options must be notified to HMRC, and the deadline is tight: notification must be made by 6 July following the end of the tax year in which the grant is made (the old 92-day deadline was scrapped from 6 April 2024). Missing this deadline can cause the option to lose its EMI tax advantages entirely, which is one of the most damaging and avoidable mistakes in the whole process.

Notification is made through HMRC's online Employment Related Securities service, which is also where the scheme is registered before grants can be notified. In practice the registration step should be completed early so it does not delay grant notification.

The annual ERS return

Beyond the initial notification of each grant, the company must file an annual Employment Related Securities return covering the scheme, reporting grants, exercises, and other reportable events for the tax year. This return is filed online after the end of each tax year. Keeping the cap table and option records current through the year makes the annual filing straightforward.

Stage seven: keep the scheme maintained

An EMI scheme is not a set-and-forget exercise. Each new grant needs its own valuation check, board approval, agreement, and grant notification. Leaver events need to be processed under the scheme rules. The annual return is due every year while the scheme exists. Building a simple calendar of these obligations prevents the missed deadlines that quietly erode the tax position.

The records that matter most are the grant agreements, the grant dates, the evidence of each notification, and the agreed valuation that supported each grant. Keeping these in one place, and updating the cap table as options are granted, exercised, or lapsed, turns the annual return into a tidy administrative step rather than a year-end scramble. It also means the scheme stands up cleanly if a future investor runs due diligence over it.

The costs to budget for

Setting up an EMI scheme involves professional fees for the legal drafting and the valuation work, and the cost varies with the company's complexity. As a rough guide, a first scheme commonly runs into a few thousand pounds for the documents and valuation combined, with subsequent grants cheaper because the framework already exists. Budgeting for this at the outset avoids the temptation to cut corners on the documents or the valuation, which are precisely the areas where shortcuts cause problems later.

A summary timeline

The exact weeks vary, but the sequence is consistent. The two stages worth starting early are the valuation and the scheme drafting, because they run in parallel and together set the pace of the whole project.

Common questions

Do we have to register the scheme before granting options?

Yes. The scheme must be registered through HMRC's online Employment Related Securities service so that grants can be notified. Registering early avoids the registration step competing for time before the notification deadline.

What happens if we miss the grant-notification deadline?

A late notification can mean the option loses its EMI status and the favourable tax treatment that goes with it. There is limited room for reasonable excuse in genuinely exceptional cases, but the safe approach is to treat the deadline as fixed and notify promptly after each grant.

Can we grant options at different times under one scheme?

Yes. A single scheme can support many grants over time. Each grant has its own agreement, its own grant date, and its own notification, and each should be made at a market value that is still validly agreed with HMRC.