EMI vs Growth Shares: How to Choose

What this guide covers

A decision framework for UK founders and CFOs choosing between EMI options and growth shares. Both are tax-efficient equity incentives, but they suit different companies, different people and different stages. This guide explains how to pick the right one - and when to use both.

It is written for boards designing an equity incentive for the first time, or reviewing a scheme that no longer fits the business. It covers eligibility, cost, tax, complexity and the six practical scenarios that usually drive the choice.

The short answer

If the company and the individual qualify for EMI, and the objective is simply to incentivise employees, EMI is almost always the better choice. It is cheaper for the recipient, simpler for the company, and protected by a statutory HMRC agreement process.

Growth shares become the right answer when EMI is not available - because the company is too large, the trade is excluded, the individual is not an employee, or the share pool is exhausted - or when the structure needs to protect existing value for founders, family or investors.

Eligibility: the gate that decides most cases

EMI is gated. Growth shares are not. The first question is therefore whether EMI is even open.

If any EMI test fails, the option is not available. That single fact eliminates EMI for a large minority of UK SMEs - particularly post-funding companies that have crossed the £30m gross-assets threshold, group structures with a non-UK element, and companies with excluded activities.

Cost and cash flow: what the holder pays

EMI options cost the holder nothing until exercise. Growth shares require a cash subscription at issue.

• EMI: The holder receives an option with an exercise price set at AMV. No cash is paid on grant. On exercise, the holder pays the exercise price and acquires the shares. The entire upside from grant to exercise is taxed as capital gain.
• Growth shares: The holder subscribes for shares at AMV on day one. The AMV of a well-designed growth share is low - typically 1-5% of the underlying equity value per percentage point of fully-diluted equity - but it is not zero. A £50,000 to £200,000 aggregate subscription is common for a meaningful management allocation.

For employees who cannot fund a subscription, or for early-stage companies where management salaries are modest, this day-one cost can be prohibitive. EMI is the clear winner on affordability.

Tax treatment compared

Both instruments can deliver capital-gains treatment of growth, but the pathway differs.

The section 431 election is the critical hygiene step for growth shares. Without it, the entire growth above the AMV-at-issue is exposed to re-characterisation as employment income. The election is cheap - the AMV/UMV gap is usually small - but the 14-day deadline is absolute.

Complexity and timeline

EMI is a well-trodden path. Most UK corporate lawyers have drafted EMI schemes dozens of times. The HMRC route is standardised: valuation, VAL231, agreement, grant, annual return.

Growth shares demand more bespoke drafting:

• Articles design - hurdle, participation ratio, dividend rights, voting, leaver provisions, tag and drag.
• Valuation - option-pricing model (Black-Scholes or binomial) rather than the earnings-multiple analysis that dominates EMI.
• Tax clearances - no statutory clearance, so the valuation evidence has to be robust enough to survive a later HMRC challenge.
• Funding mechanics - how the holders pay for the subscription (personal cash, loan, salary sacrifice).

A straightforward EMI scheme takes 6-10 weeks from kick-off to grant. A growth-share scheme takes 4-8 weeks for a simple structure, longer where the hurdle design is novel or the capital structure is complex.

The six scenarios that drive the choice

Most real decisions fall into one of six patterns.

1. Early-stage startup, pre-funding, all employees qualify

Choice: EMI.

No reason to add the cost and complexity of growth shares. EMI is free to the holder, protected by HMRC, and familiar to future investors.

2. Post-Series A scale-up, gross assets now above £30m

Choice: Growth shares.

The £30m gross-assets test is absolute and includes the recent funding round. EMI is no longer available. Growth shares are the standard replacement for employee equity incentive at this stage.

3. Family business, succession to the next generation

Choice: Growth shares (often within a freeze-and-growth reorganisation).

EMI cannot be issued to family members who are not employees or directors, and the 30% material-interest test blocks children who already hold some shares. Growth shares can be issued to children, trusts or any family structure. Combined with a freeze, they channel future value to the next generation while capping the founder's estate.

4. Mixed team - employees and key advisors

Choice: Both.

Employees receive EMI options. Non-employee advisors, consultants or NEDs receive growth shares. The two instruments sit cleanly on the same cap table provided the growth-share hurdle is set at or above the current market value.

5. Pre-sale, 12-18 months to exit

Choice: Usually neither; sometimes growth shares with caution.

With a short time horizon and a known exit price, the day-one AMV of growth shares can be substantial - and the income-tax risk on issue significant. EMI is also less attractive close to exit because the 24-month BADR holding period from grant may not be met. In this window, unapproved options or direct equity may be more appropriate.

6. Exhausted EMI pool

Choice: Growth shares for the overflow.

The £3m company limit and £250,000 individual limit are cumulative over unexercised options. A company that has granted EMI aggressively may hit the cap. Growth shares are the standard next instrument.

Dilution and cap table impact

Both instruments dilute existing shareholders, but the timing and visibility differ.

• EMI dilution is deferred until exercise. The founder does not know exactly when dilution will hit - it depends on exercise patterns, leaver events and the exit timeline. The option pool is a known overhang.
• Growth-share dilution is immediate on issue. The fully-diluted share count increases at allotment, and the founder knows exactly who holds what. However, the economic dilution only bites above the hurdle.

From a founder perspective, growth shares offer cleaner cap-table visibility. From an investor perspective, EMI is often preferred because the option pool is a standard term-sheet component and the economics are well understood.

Can you use both?

Yes. Many UK companies run an EMI scheme for employees and a separate growth-share class for senior management, advisors or family. The two instruments are not mutually exclusive provided:

• The growth-share hurdle is set at or above the current market value.
• The growth-share issue is reported on the annual ERS return.
• Section 431 elections are filed for employee holders of growth shares.
• The articles clearly rank the two classes and any future preference shares.

Using both requires careful cap-table modelling to avoid unintended cross-class interactions on exit.

Worked example: a £12m UK B2B services company

A UK professional-services group has 180 employees and gross assets of £28m. It qualifies for EMI.

The board wants to grant equity to:

• 12 mid-level managers (all employees)
• 2 senior non-executive directors
• The founder's two children, both active in the business

Decision:

• The 12 managers receive EMI options. Each is granted options over 0.5% of fully-diluted equity at an exercise price of £1.20 per share (the agreed AMV). No day-one cost. VAL231 filed and agreed by HMRC.
• The 2 NEDs cannot receive EMI (they fail the 25-hour / 75% working-time test). They are issued growth shares with a hurdle of £12m, participating pro-rata above the hurdle. Each subscribes for 1% of fully-diluted equity at an AMV of £35,000. Section 431 elections filed within 14 days.
• The founder's children are not employees. They are issued growth shares through a family trust, with the same £12m hurdle and a 1% allocation each. No section 431 election (not employment-related). The subscription is funded by a loan from the company, repayable from future dividends.

Outcome: All recipients participate in future growth. The founder's existing value is protected. The EMI route provides HMRC certainty for the majority of the grant. The growth-share route covers the ineligible recipients without distorting the EMI scheme.

Common mistakes in choosing between the two

FAQ

Related guides

• EMI valuation guide - how EMI valuations are built and submitted to HMRC
• Growth shares explained - hurdle design, option-based valuation and the section 431 election
• Freeze and growth reorganisations - the family-business context in which growth shares are most commonly used
• Section 431 election - the 14-day election that secures CGT treatment for restricted shares
• What is my business worth? - the valuation foundation underlying both EMI and growth-share structures