Legal Expert Warns Startups Are Still Mishandling EMI Schemes

ST ALBANS, U.K. - EntSun -- JPP Law, a commercial law firm advising startups and scale-ups, is urging founders to review their Enterprise Management Incentive (EMI) schemes after identifying recurring legal errors that can jeopardise valuable tax advantages.

EMI options remain one of the most tax-efficient ways for growing businesses to incentivise and retain employees without affecting cash flow. However, the legislation is technical and compliance-driven, and mistakes can carry permanent consequences.

"We regularly see EMI schemes because founders underestimate how technical the framework really is," said JP Irvine, commercial lawyer and EMI specialist at JPP Law. "Issues often surface during investment or exit due diligence. By that point, the tax benefits to employees may already have been lost."

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Drawing on its experience auditing and repairing EMI arrangements, the firm highlights several common risk areas.

Share class structure

A frequent mistake is granting options over standard ordinary shares without considering valuation and governance implications. Ordinary shares usually carry full voting and dividend rights, increasing their market value and, in turn, the exercise price employees must pay.

A bespoke employee share class with carefully limited rights can produce a more efficient valuation outcome and a cleaner long-term capital structure, provided it is properly drafted and aligned with the company's Articles of Association.

Compliance failures

EMI is not a one-off documentation exercise. Option grants must be notified to HMRC within strict deadlines, and annual returns must be filed by 6 July each year. Companies must also maintain accurate internal records of vesting, exercises and share issuances.

Missed deadlines or reporting errors can result in options losing their EMI status permanently.

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Vesting versus exercise

Vesting means an employee has earned the right to exercise their option, subject to the scheme rules. Exercise is the separate legal act of acquiring shares. Confusing the two can create inaccurate cap tables and governance issues.

Leaver terms and alignment

EMI schemes must operate consistently with a company's Articles and any shareholder or investment agreements.

Clear leaver provisions are also critical. Founders should address vesting cut-off points, exercise windows and how options or shares will be treated on exit. Where employees hold shares at sale, their rights must align with drag-along and other transaction provisions.

From April 2026, expanded EMI thresholds will increase limits relating to employee numbers, gross assets and total option values. While this offers greater flexibility, founders close to the limits should review their position carefully before making new grants.

JPP Law advises startups and scale-ups on EMI schemes, employee incentives and corporate governance. For further information, visit https://www.jpplaw.co.uk/