Successfully leading a startup through those crucial early years is all about finding the right people. At this stage, your employees could make or break your business, and a share scheme is a great way to get talented people on board.
We sat down with Lennon Legal’s Founder, Gretchen Lennon, to draw on her 15 years of experience advising private companies about share option plans. Gretchen highlighted the key benefits and potential pitfalls of granting equity to employees.
Setting up a share scheme
Gretchen started by emphasising the importance of early-stage companies getting “the right sort of equity incentive plan in place for their business, to ensure maximum incentivisation and reward for their team.”
While the scheme has certain parameters, it’s not one-size-fits-all. Each company should design its plan in a way that suits its needs and the needs of its employees. One example is determining the size of the option pool.
“Generally speaking, 10-15% of fully diluted share capital is a good rule of thumb for companies at seed stage or Series A. This will likely be diluted as the company goes through further funding rounds, but investors are aware of the importance of share options to attract and retain talent, so they are usually comfortable with an option pool top-up later.”
Gretchen Lennon, Founder, Lennon Legal
Gretchen also flagged the importance of including well-drafted leaver provisions in the option plan rules or share option agreement. “Leaver provisions that are not clearly drafted may be hard to enforce. If they are too harsh, however, they could end up disincentivising the option holders.” She went on to say that companies need to be aware of the distinction made in their share option documentation between good and bad leavers.
Early mistakes can be costly
Over her career, Gretchen has advised businesses of all sizes, from startups and scale-ups to multinational listed companies. With such a vast portfolio, she has witnessed many of the common mistakes made by companies launching employee share schemes.
The first hurdle is eligibility. As appealing as the EMI scheme is, it’s all too easy to overlook the qualification criteria. Not all businesses qualify for EMI in the first place, and even qualifying businesses should proceed with caution. Gretchen called attention to “the statutory limitations regarding the types of companies that are permitted to grant EMI options, and the limits on total number of EMI options that can be granted.”
Key eligibility criteria include:
Your company must have fewer than 250 full-time equivalent employees (including directors), or fewer than 500 for options granted on or after 6 April 2026.
Your company must have no more than £30 million in gross assets (across the group, if applicable), or £120 million for options granted on or after 6 April 2026.
The individual grant limit is £250,000 in unexercised EMI options per employee.
The aggregate unexercised EMI options across the company must not exceed £3 million, or £6 million for options granted on or after 6 April 2026.
Options must generally be exercisable within 10 years of grant; this is extended to 15 years for options granted on or after 6 April 2026, and existing unexercised options can be updated to benefit from the longer window.
Further, your company must have a permanent establishment in the UK, be independent, and operate a qualifying trade.
Any options granted beyond the individual or company limits will not be eligible for EMI tax benefits.
Another potentially costly mistake that Gretchen has seen is companies making pledges to employees about equity ownership before having a detailed share option plan in place. “I’ve seen employment contracts promising a certain percentage of the company’s shares, without caveating this as being subject to dilution or any specific vesting or leaver provisions,” she said.
An oversight like this can have serious consequences. “In some cases,” Gretchen explained, “this gives the leaving employee an enforceable claim over the specified percentage of the company. They could alternatively seek payment equivalent to that percentage of the company’s value, just to settle the claim.”
Follow government guidelines
When asked which elements of the EMI scheme are crucial, Gretchen identified “a clearly drafted vesting schedule and provisions regarding when an EMI option will become exercisable.” She went on to explain that, with regular updates to HMRC guidance on discretionary terms in EMI option schemes, “it’s more important than ever to ensure the documentation provides sufficient clarity regarding exercise events.”
Regulations continue to evolve. For example, the rules around EMI share schemes have been updated a number of times in recent years to make the process simpler and allow more companies to qualify:
As of 6 April 2023
Companies no longer need to inform HMRC about restrictions attached to shares in EMI option agreements, and the requirement to include a working time declaration was removed.
As of 6 April 2024
The notification deadline for EMI option grants changed from 92 days after each grant to a single annual deadline: companies must now notify HMRC of all EMI options granted in the previous tax year by 6 July following the end of that tax year.
As of 6 April 2026
The government announced that, for options granted on or after 6 April 2026, the gross assets limit would increase to £120 million, the employee headcount limit to 500, the company option pool to £6 million, and the exercise window to 15 years. Existing unexercised EMI options can also benefit from the extended exercise period if the terms are updated.
A word to the wise
When asked what parting advice she would give to a CEO about to set up their first equity incentive plan, Gretchen recommended the EMI scheme above all else.
“If your company qualifies, always go for EMI. EMI options are the most tax efficient way of granting equity awards to employees in the UK.”
Gretchen Lennon, Founder, Lennon Legal
