Key clauses

This section explains the key clauses associated with a TechFranklin EMI option deed.

Share class under option

A company can have more than one class of share. This clause specifies which class of share the option agreement gives the Optionholder the right to acquire.

Nominal value of share class

Under UK company law shares have a so called nominal value. This is unrelated to what the share might actually be worth and instead relates to the amount of money the shareholder needs to pay to the company when the shares are issued.

In TechFranklin EMI option deeds the exercise price is always at least equivalent to the nominal value of the share under option. This means the Optionholder can become a shareholder of newly issued shares by using the exercise price to fund the acquisition of the shares.

Number of shares under option

This clause specifies the number of shares that can be acquired pursuant to the option deed. However it is important to note that the option may be subject to time based vesting and therefore at the time of exercise the Optionholder may only be able to acquire a smaller number of shares.

Exercise price

An option is the right to acquire a share at a specified price in the future. This is known as the exercise price. The lower the exercise price the better for the Optionholder.

Example: If a share under option is worth £10 and the exercise price of the option is £2, then the Optionholder can realise an £8 profit when they exercise their option and subsequently sell their share.

Time based vesting

Depending on when the option is exercised the number of shares acquired might be less than the number of shares under option. This is because an option agreement can be subject to vesting so that the Optionholder is not able to acquire all the shares under option on grant but instead is able to acquire an increasing number of shares as time passes.

Vesting schedules can become very complex however TechFranklin option deeds follow a simple straight line monthly schedule.

Example: An option agreement has 10 shares under option and a 1 year vesting period

  • 6 complete months after the grant date (50%) 5 of the shares have vested
  • 12 complete months after the grant date (100%) 10 of the shares have vested
  • 3 complete months after the grant date (20%) 2 of the shares have vested when the number is not whole, then vesting rounds down.
Exit only

If an option is exit only then it can only be exercised in the event of a so called Exit. If an option is not exit only then in TechFranklin option deeds the option can be exercised, prior to an exit event, by the Optionholder subject to the consent of the Directors of the company.

However in all circumstances under TechFranklin option agreements the option is exercisable if an exit event happens.

An Exit includes the following events:

  • Listing: means the admission of all of the Shares to the Official List of the Financial Conduct Authority, and to trading on the London Stock Exchange’s market for listed securities, or to trading on AIM of the London Stock Exchange or any other Recognised Investment Exchange
  • Takeover: means an unconditional agreement giving rise to a change of Control of the Company where any person, other than a person who is a shareholder at the date of execution of this Agreement, (whether alone or together with any associate) becomes the beneficial owner of shares in the issued ordinary share capital of the Company carrying the right to exercise more than 50 per cent of the votes.
  • Sale: means the sale as a going concern of the whole or a substantial part by value of the assets of the Company and its subsidiaries
Good leaver

If the option agreement allows for good leavers then if the Optionholder ceases to be an employee they can keep their options, to the extent they have vested, after they leave subject to the constent of the Directors of the company. However if the option agreement does not allow for good leavers then if the Optionholder ceases to be an employee then their options are forfeited.

If an employee leaves and keeps their options then subject to the options not being exercised promptly the options will lose their EMI status.

Signing process

Once an option has been created and paid for, the signing process commences where each individual signs one after the other.

1. Optionholder

The Optionholder will receive an email link to complete a form where they need to specify their:

  • national insurance number why this matters
  • witness's name
  • witness's occupation
  • witness's email

The Optionholder will then receive an email to e-sign their option and their witness will be notified of their nomination.

The witness should see the Optionholder e-sign the option deed. For the purposes of an option deed a family member can act as a witness.

2. Optionholder's witness

The Optionholder's witness will receive an email link to e-sign the option as the witness of the Optionholder.

3. Director

The Director will receive an email link to e-sign the option.

Before the signing process commences the Director's witness will have already been selected in the TechFranklin application.

4. Director's witness

The Director's witness will receive an email link to e-sign the option. The Director's witness can be another Director

Once the Directors's witness has signed the signing process is complete and the final document is available within TechFranklin as an e-signed pdf.

Once the signing process is complete it is crucial that an EMI filing notification is made to HMRC.

Director permission to grant options

It is important that the Director has the necessary permissions to grant EMI options.

If the company has only one director then naturally they have permission.

However if there is more than one director then a written directors resolution which gives permission to the individual directors to grant options is usually required, subject to the articles (if you have model article such a resolution is required).

TechFranklin can provide an appropriate e-signed resolution free of charge.


EMI (Enterprise Management Incentive) is a tax treatment for a share option which means the Optionholder is taxed under Business Asset Disposal Relief (a variation of capital gains tax) instead of being taxed under PAYE/employment income. The legislation which governs EMI is ITEPA (2003) Section 527. The following analysis of the legislation is a user friendly summary. If you are unsure whether the options you are issuing qualify for EMI we suggest you consult with a professional advisor.


Assuming the option is valid for EMI then the exercise of the option and sale of the underlying shares can be eligible for business asset disposal relief. Howevever some of the gain may be subject to PAYE if the AMV at grant of the option is greater than the Exercise Price of the option.

If AMV Exerice Price then:

  • (AMV - Exercise Price) x Shares is taxed under PAYE
  • (Value Share - AMV) x Shares is taxed under Business Asset Disposal Relief
If AMV < Exercise Price then:
  • (Value Share - Exercise Price) x Shares is taxed under Business Asset Disposal Relief
This dependency on AMV is a why a low AMV valuation at grant is advantageous since it means more of a gain can be taxed under Business Asset Disposal Relief and it is why setting the Exercise Price equal to AMV is the most tax advantageous approach.

Business Asset Disposal Relief

Is a variation on Capital Gains tax on business assets which means that:

  • The first £12,300 is taxed at 0% (reflecting the annual personal allowance for Capital Gains)
  • Then the first £1,000,000 of Pre-Tax Gain (after the personal allowance) is taxed at 10%
  • Anything over £1,000,000 is taxed at 20% under normal Capital Gains Tax
To be eligible for Business Asset Disposal Relief the option needs to have been granted 2 years before the sale of the underlying share. Otherwise the first £1,000,000 of Pre-Tax Gain is taxed at 20% instead of 10%.

Unapproved option

If the option is not valid for EMI then the gain is taxed under PAYE which includes:

  • Income Tax
  • Employee's National Insurance
  • Student Loan
  • Employer's National Insurance

Free tax calculator

The tax calculations for EMI and unapproved options are not entirely straight forward. So we have built our free to use EMI vs Unapproved calculator to help you quantify the difference.

Qualifying company

To qualify for EMI the shares under option need to be in a company which meets the following requirements:

  • the number of full time equivalent employees in the company is less than 250
  • gross assets less than £30m

    Independence Requirement

  • the company must not be a 51% subsdiary of another company.
  • the company must not be under the control of another company

    Non-qualifying trades

    The activies of the company must not consist to a substantial extent the following activities:
  • dealing in land, commodities, futures or shares
  • dealing in goods otherwise than in the course of an ordinary trade of wholesale or retail distribution
  • banking, insurance and other financial activities
  • leasing and hiring
  • receiving royalties or license fees (save in respect of intellectual property created by the company or group itself)
  • legal or accountancy services
  • property development
  • farming or market gardening
  • forestry, woodlands or timber production
  • shipbuilding, coal or steel production
  • managing hotels
  • managing nursing or residential care homes
  • acting as a “service company” in providing any such activities to an associated business
Qualifying employee

The Optionholder must be an employee of the company (or subsidiary of the company) and the time they spend working for the company exceeds:

  • 25 hours per week
  • if less, then 75% of the employee's working time
  • a material interest (30%) in the company at the time of grant

As part of a TechFranklin EMI option deed the Optionholder recognises they meet the qualifying employee condition.


An individual can be granted EMI options, valued per unrestricted market value, up to £250,000.

The company can have have granted, valued per unrestricted market value, £3m of unexercised EMI options.

EMI notification filing

92 days from the date of an EMI option award HMRC need to receive notification of the award, otherwise the option is not eligible for EMI treatment.

HMRC need to receive the following submitted into the HMRC PAYE (ERS) portal for EMI notification (the person with PAYE Government Gateway access needs to do this):

  • Date of grant of the option(s)
  • Whether the notification is in respect of a replacement option (i.e has one option been exchanged for a new option)
  • Whether the Optionholder is employed by the company which has its share under option (for example the employee may be employed by a subsidiary and therefore is not employed by the company which has its shares under option)
  • Company name and address
  • Whether the shares under option are a share which is already issued share capital (i.e does the share class under option have shareholders)
  • Whether the company has more than one class of shares
  • Unrestricted Market Value (UMV) at grant
  • Actual Market Value (AMV) at grant
  • Whether a valuation was agreed with HMRC and an associated reference code

And the following information: (which can be generated from a TechFranklin EMI notification document)

  • Employee first name
  • Employee second name (if it exists)
  • Employee last name
  • National Insurance number how we get this
  • Number of shares under option
  • Exercise price per share
  • Actual market value per share
  • Total unrestricted market value at date of grant of employee's unexercised options including CSOP options (this assumes all EMI options owned by the employee are reflected in the TechFranklin system and the employee has no CSOP options)
Tax valuation

As part of the EMI notification filing the UMV and AMV of the shares under option needs to be included.

It is not mandatory that UMV and AMV be agreed with HMRC before the award of the options. However HMRC do provide a service where they will provide UMV and AMV valuations agreements for EMI options. These valuation agreements last for 120 days from the date of response from HMRC.

On the TechFranklin platform you can:

  • upload your own valuations
  • generate valuations and TechFranklin handles the correspondence with HMRC

UMV stands for Unrestricted Market Value and AMV stands for Actual Market Value. These valuation concepts are unique to UK taxation.

The main difference to understand is that UMV reflects the value of the shares without any restrictions while AMV relates to the value of the shares with restrictions.

An example of a restriction could be a contract which says a shareholder is not allowed to sell their shares for a number of years. Obviously such a restriction would reduce the value of the shares and therefore the AMV of the shares would be lower than the UMV.

The question as to whether something is or is not a restriction and the extent to which it impacts value is often a matter of legal uncertaintity and professional judgement. However for the vast majority of companies issuing EMI options the distinction between AMV and UMV is negligible to non-existent and is of little importance.

The key thing to understand about UMV and AMV is that you want these numbers to be as low as reasonably possible because: