EMI share options, anybody have any experience?

[NervySi]

I have been granted the option to buy a number of shares in the (small) company I work for under an EMI scheme. The agreement states that I can exercise my option only on the completion of an 'exit event', i.e. the whole or majority sale of the company, at which point I would simultaneously sell my shares at the agreed purchase price and sell at the then current price. Many people in the company have been granted similar options.

I wondered if anybody here has personal experience of successfully selling their shares under an EMI scheme? Plenty of websites detail the eligibility and taxation factors, but I have not personally heard of anybody exercising their options and what actually happens. So, anybody done this? Is it as straightforward as I am led to believe? Does the employer - or the company buying them out - have any means whereby they could delay or apply additional conditions to the pay out? Bearing in mind that any company buying us out would presumably prefer to retain the current experienced employees, rather than see them all cash-in and sod off. Also, with about half of the employees having agreements of greater or smaller scope, any purchasing company stands to pay out a heck of a lot of cash that they will effectively lose there and then. Or am I misunderstanding how this all works?

This might seem like an odd thing to ask about, but the agreement was presented to me on the basis that it will deliver fantastic results (no more mortgage, no need to work etc. merely because I accepted the job) and I believe the old saying that if something seems too good to be true, it probably is!

[mikef]

For the acqiring company this is just part of the purchase price. Your employer should sort out all the arrangements for you, they'll be doing it for founders and execs with a much higher stake. If you don't have other capital gains you should be able to get 10,600 free of tax, twice that if you're married and the company is cooperative

Just from experience, no qualifications in this area

Don't spend it until you see it in your bank account...

[northandy]

Had something similar myself, was offered a job (start up private equity backed) was allowed to buy 800 of shares which when the company was sold were expected to be worth 300 times that amount.

As it happens i left after 8 months and was given my cash back, company has struggled since and recently had to get further cash from the backers, employees were told their shares were effectively worthless now due to the dilution.

[fridaypassion]

Same here. Lesson learned!

[wattsm666]

When you do get to exercise and sell, assuming done at the same then you won't qualify for 10% ER, you will pay either 18% or 28% capital gains tax.

They are good though if you exit. Seen a number of clients staff exit under this route and walk away with substantial funds.

[fridaypassion]

I believe (unless its an urban myth) that a graffiti artist who decorated facebook's first offices is due to become a very rich man.

Company I worked for were aiming to sell to a big competitor which would have resulted in me having no mortgage. Company is diluted to hell and struggling now. Luckily I'm not one of the poor souls hanging on there being dished out more options. I left 9 years ago and there are still people hanging on in there now!

[jontysafe]

I have foregone a payrise for 9 years in return for 5% equity shares per year so will own 40% after the 9 years. I get paid through dividends which is tax efficient. At the moment the shares are worthless and there is an agreement in the first 5 years I would have to sell them back to the company for their initial value.
I'm paid well or I would have not gone with this scheme. Turnover is approx 15mill with a good profit margin hence we can all be paid through dividends. In my opinion the divi is their only value for now.

[therealpigdog]

All depends on whether you are paying for the option as to whether it makes commercial sense.

All relatively simple on a sale. You will be asked to sign some transfers, and will get cash in return - no guarantees how much though.

Worth checking that you don't have to give any warranties etc on the sale - but if it has been created by any half-competent lawyer that should be the case.

[blindswelledrat]

NervySi said:

This might seem like an odd thing to ask about, but the agreement was presented to me on the basis that it will deliver fantastic results (no more mortgage, no need to work etc. merely because I accepted the job) and I believe the old saying that if something seems too good to be true, it probably is!

Noone can really advise you without knowing the details of the company etc.
WHat is for sure is that there is nothing negative about it. Obviously you cannot calculate its worth as 'salary' but it should definitely be seen as a plus that if you hep the company achieve its goals then you are aslo going to benefit from it.

[NervySi]

Thanks for your views folks, very useful. I think my uncertainty is pretty much addressed by the last post - I don't suppose there can be a negative side, things will potentially either work out well or just stay as they are! The taxation issue is something I am really not well versed on and should swot up on, by the sounds of it.

[blindswelledrat]

[quote=NervySi! The taxation issue is something I am really not well versed on and should swot up on, by the sounds of it.
[/quote]

But even that is a positive!
You will only get taxed at the point that they pay off, thus 'worrying' about being taxed when a huge windfall comes your way is unneccesary. Tax is only a proportion of actual gain.

[Deva Link]

NervySi said:

Thanks for your views folks, very useful. I think my uncertainty is pretty much addressed by the last post - I don't suppose there can be a negative side, things will potentially either work out well or just stay as they are! The taxation issue is something I am really not well versed on and should swot up on, by the sounds of it.

I'd be quite worried by the kind of people that made the promises you indicated in your OP. One very senior manager in a previous company I worked for utterly believed, and even had a presentation to show how it would happen, that our share options would be worth $1000 each. As I had 10K of them, that would have been pretty nice. We all knew it was bks though.

[blindswelledrat]

Deva Link said:

I'd be quite worried by the kind of people that made the promises you indicated in your OP. One very senior manager in a previous company I worked for utterly believed, and even had a presentation to show how it would happen, that our share options would be worth $1000 each. As I had 10K of them, that would have been pretty nice. We all knew it was bks though.

WHy be worried though?
It doesnt cost you anything if it doesnt work out.
THe company don't have to give you these options. Its just the directors saying that if thier employees help them to achieve thier goals then they intend to see them rewarded.
SO what if the director is ambitious and unrealistic? It might happen or it might happen at a much reduced amount or it might not happen. Whats the problem, or "worry" in any of those scenarios?

[Deva Link]

blindswelledrat said:

Whats the problem, or "worry" in any of those scenarios?

That the people running the company are full of st.

What kind of company director would promote this to employees on the basis that they won't need to work in future? So that's great - the people who helped build the company all get rich and leave.

[blindswelledrat]

Deva Link said:

blindswelledrat said:

Whats the problem, or "worry" in any of those scenarios?

That the people running the company are full of st.

What kind of company director would promote this to employees on the basis that they won't need to work in future? So that's great - the people who helped build the company all get rich and leave.

I guess it depends in the figures in question and the stage at which one has entered the company.
Obviously the likelihood is that the suuposed multiple of the share value will correspond with how early you are on-board and a higher risk of it not happening.
In your scenario you knew the figures yourself and you knew for a fact it was bks (nothing lost obv.), but you can't project that assumption onto the OP as you have no idea of the specifics of the proposal

[Deva Link]

blindswelledrat said:

... but you can't project that assumption onto the OP as you have no idea of the specifics of the proposal

Sure, but the language used "we're all going to be rich!" sounds very familiar.

[NervySi]

Thanks for all your input, I feel I ought to add in a few facts (without being too specific, natch). I joined the company at the end of its first year (it was by no means on a certain footing - we were often paid late). I was granted share options under EMI rules at one pound each. The following year, a couple more employees were offered shares at 3 pounds each. The company is about to post a profit at the end of its third year, and is so far in line with or ahead of investors' expectations.

As to whether I am paying for the option, it has been made clear that the option goes to make up for the lack of pension, healthcare etc. Obviously I would have to pay out the initial purchase price of my shares.

<quote>Sure, but the language used "we're all going to be rich!" sounds very familiar.<quote/>

Yes, and that's partly the reason for my OP. That sort of talk won't wash with my building society, and I need to make plans for my future which are not based on promises.

<quote>one thing to look for is whether you are required to roll your interest on an EXIT, i.e. roll your investment into the new owners (so you don't cash out, you just flip - it's not fair on the smaller holders, but many many main shareholders and directors simply don't give a feck about you (as you will find). Plus, will you be granting a POA to the trustees of the scheme to do whatever they like ?<quote/>

Now this is interesting - what is a flip and how does it work? Why is it unfair for a smaller holder like me? I would be retained and my options roll over under a new agreement? What then, wait for another exit event? It was suggested to me (by a colleague who has also never done this) that I might be asked to 'trade' options under the new ownership for benefits or better conditions. What is a POA? By trustees I guess you mean the chairman etc?

If it sounds like I'm out of my depth with this.... I am!

[beeej]

Two years on, have you got any new opinions/experiences? How do you feel about the scheme? Did the scheme replace other benefits?

[fridaypassion]

Interesting seeing this pop back up. The company mentioned in my post above was actually bought out in the end. For £1. They had been struggling and in desperation even sent an email out to all the existing shareholders trying to raise 200k to see them through what was normally a busy time. The options weren't transferred to the new company I guess they all got 2p each or something. A sad end to a great business. Credit crunch did them.

I believe the new group bought them pretty much for the website. They had little in the way of stock or assets.