The Enterprise Management Incentive (EMI) scheme is one of the best tools UK founders can use to attract and retain top talent. But many founders are unsure how an employee’s EMI Share Option Scheme is handled when they leave.
The outcome depends on the EMI scheme rules, the employee’s leaver status, and whether their options have vested or not.
In this guide, we’ll break down how EMI options are treated when employees leave and what steps founders can take to protect both the company and the employee.
What is an Employee Share Option Scheme?
An Employee Share Option Scheme (ESOS) is a program that grants employees the right to purchase company shares at a fixed exercise price after a set vesting period, giving them a potential financial benefit if the company’s value increases.
In the UK, most startups use the EMI scheme. According to HMRC, 89% of the 20,370 companies running a tax-advantaged share scheme in 2024 chose EMI and 99% operated no other tax-advantaged scheme alongside it.
EMI permits an individual employee to hold up to £250,000 worth of unexercised options at any one time, offering a much larger tax-sheltered allocation than other schemes.
From April 2026, the scheme became more accessible. The employee limit increased from 250 to 500, the gross assets threshold rose from £30 million to £120 million and the maximum holding period extended from 10 to 15 years. The total value of shares available under EMI also doubled from £3 million to £6 million.
These changes give startups and scale-ups using equity to attract and retain talent considerably more room to work with.
What are the plan rules in the EMI Share Option Scheme?
The plan rules outline the terms and procedures of the EMI Share Option Scheme for both the employer and the employee. They provide transparency, set clear expectations and help avoid disputes by protecting the company’s interests.
What happens to your EMI Share Option Scheme when an employee leaves?
As a founder, you’ll need to decide how an employee’s EMI Share Option Scheme is treated when they leave the business. The outcome will depend on the specific circumstances but here’s how it typically works:
Vested options
Vested options are shares that the employee has already earned the right to exercise. After leaving, they can usually purchase these shares by paying the exercise price within a set window (commonly 90 days) to avoid forfeiture.
You may also have the right to buy back vested shares at a pre-agreed price depending on the plan rules.
Unvested options
Unvested options are shares the employee has not yet earned because the vesting period is incomplete. In most cases, these options lapse when the employee leaves. This protects the company by ensuring only those who stay and contribute over time benefit from the scheme.
For example, if an employee is granted 800 options with 300 vesting after a one-year cliff and they leave at that point, they keep the 300 vested options but the remaining 500 lapse.
These lapsed options can then be returned to the option pool and reallocated to other employees, providing a cost-effective way to incentivise new hires or reward existing team members without increasing your overall share capital.
Exercised options
In some cases, the plan rule agreement may require an employee to exercise their options before leaving the company. This means converting the options into shares before departure. If they choose not to exercise, the options will usually lapse.
Buy-back right options
When setting up your EMI Share Option Scheme, you can include buy-back provisions. These allow your company to repurchase shares from employees who leave, preventing ex-employees from holding onto shares and potentially influencing future decisions.
A buy-back arrangement works in everyone’s favour. It gives you greater control over ownership and avoids EMI valuation disputes while providing former employees with liquidity when they exit.
The company is generally not obliged to buy back shares if it chooses not to. The buy-back price can be set depending on whether the employee is a good leaver or a bad leaver.
What is a good leaver and a bad leaver?
A good leaver is an employee or shareholder who leaves the company under acceptable circumstances such as after long service, retirement or due to involuntary reasons like incapacity. In contrast, a bad leaver departs under unfavourable circumstances often involving misconduct, breach of contract, or failure to meet performance expectations.
Your EMI Share Option Scheme can define the conditions that classify an employee or shareholder as a good or bad leaver and specify how the fair market value of their shares is calculated.
Typically, good leavers receive shares at market value while bad leavers may receive a lower price like 50% of market value.
It’s also recommended to include Power of Attorney provisions for bad leavers. This allows the company to act on behalf of the employee to complete any necessary documents relating to their shares.
FAQs about EMI Share Option Scheme
How do employees fund their EMI options?
Employees usually need to self-fund the exercise price when leaving as there is no cash from a company exit. They should also consider the risks of holding unmarketable shares from their former employer.
Are there tax consequences when a leaver exercises their EMI options?
It depends entirely on timing. If a leaver exercises their vested options within 90 days of leaving the company, they retain full EMI tax advantages meaning no Income Tax or National Insurance (NICs) is due on the exercise (assuming the options were granted at market value).
However, if they exercise after the 90-day window, the EMI status is lost for any growth after the departure date. In that scenario, the post-leaving gain is treated as employment income, meaning the employee may face Income Tax via PAYE, and the employer may owe NICs.
Can an employee exercise EMI options if they are transferred overseas?
Yes. Employees may be allowed to exercise their EMI options when moving overseas, particularly to avoid adverse tax consequences.
What happens to EMI options if an employee changes roles within the group?
If an employee changes roles, they must continue to meet the EMI working time test to remain eligible for the scheme.
At Rise Accounting, we support founders with tax-efficient EMI scheme setup and ongoing strategic financial planning. Whether you’re setting up a new plan or managing leaver situations, our team is here to support you at every stage.
Contact our team here to learn how we can support you.
