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EMI and CSOP valuations for startups and scale-ups

In order to issue equity to employees via EMI or CSOP schemes and investors or raise funds, you need to know what your company is worth. In the UK, you find this out by following an official process known commonly as an HMRC valuation.

Here are some of the key terms related to HMRC valuations:

  • Enterprise Management Incentive (EMI)
    The UK’s most popular employee share scheme. It provides a tax-efficient means of rewarding, incentivising and retaining qualifying employees. Among other benefits, participants pay no tax upon exercising their options, and only 10% capital gains tax on selling their shares.

  • Company Share Option Plan (CSOP)
    A government-approved share scheme in the UK, in which options are available for exercise three years after the grant date and capital gains tax applies at the point of sale. Income tax and national insurance contributions do not apply.

  • HMRC
    His Majesty’s Revenue and Customs, commonly abbreviated to HMRC. The UK government department responsible for collecting taxes from individuals and businesses. EMI and ERS annual returns are filed with HMRC.

  • VAL231
    The application form for a share valuation in connection with Enterprise Management Incentives (EMIs) which is submitted to HMRC for approval.*

  • Significant event
    An event that triggers a change in the share value of the business such as issuing options, preparing for an IPO or M&A deal or a new round of funding.
For more equity-related terminology, check out the Capdesk equity glossary.


A simple definition of HMRC valuations

An HMRC valuation determines the cost of purchasing a single share in your company.

The values of shares of publicly traded companies are set by the market. On the other hand, private companies require an independent arbitrator to agree to their proposed valuation. In the UK, this is HMRC.

Find out more about Capdesk's EMI and CSOP valuations services.

 

Why do you need an HMRC valuation?

HMRC valuations establish your company’s share price. This allows you to grant options to employees who receive them with confidence in their value.

When companies do not perform a valuation correctly, they may fail to price options appropriately. Mistakes when pricing options have repercussions for both the business and employees.

Companies open themselves up to significant tax risks, while employees may be taxed at a higher rate because their options were issued below cost. Employees will not benefit from the tax advantages of approved EMI or CSOP share schemes.

When do you need an HMRC valuation?

HMRC valuations are required when issuing shares through a tax-advantaged employee share scheme, such as EMI or CSOP. If you plan to offer equity in the future, you need an up-to-date HMRC valuation.

However, valuations have an expiration date – for EMI and CSOP valuations this is 90 days.

Note, you only need to inform HMRC about the significant event at the time of your next valuation. Most significant events will change the value of the company and its shares which means you need to reapply to have your shares valued. This new valuation will only impact future option grants.

 

What information do CSOP and EMI valuations require?

To perform a valuation, you must establish the company’s Unrestricted Market Value (UMV) and its Actual Market Value (AMV).

  • UMV
    The value of all shares if there were no restrictions on buying and selling them (e.g. leaver provisions). UMV establishes the maximum amount a company can award to an individual and the maximum they can award in total.
  • AMV
    Takes into consideration any restrictions on the shares and sets the value accordingly. This means AMV is usually lower than UMV.

These figures make up the valuation report for EMI and CSOP and are submitted to HMRC along with a VAL231 form. Your report is calculated using financial, corporate and qualitative information such as your cap table, financial forecasts and previous valuation reports.

Need an HMRC valuation for your EMI or CSOP share scheme? Get started with Capdesk.

Growing businesses are regularly hiring new employees with equity incentives becoming more commonplace in compensation packages. A current valuation allows the company to grant options every quarter meaning new hires are enrolled on the employee share scheme as quickly as possible.

Why is this important?

Employee share schemes are an increasingly influential tool for attracting and retaining talent. According to Capdesk Co-Founder Christian Gabriel, everyone should have equity in some shape or form.

“It's the only remuneration structure that completely aligns the board, founders, management and employees,” he claims.

Dan Hardaker, Chief People Officer at Penta, also believes that equity can be embedded into the strategy for engaging and rewarding staff:

“We can move equity beyond being just a transaction, beyond a piece of paper you sign to onboarding and internal comms. We can sell it as a strong benefit. People have to work hard in a startup – it’s not easy. Sharing in success motivates employees.”

However, when employees have to wait long periods for the option grant they’ve been promised, it diminishes the excitement and motivation they take from equity.

With an up-to-date valuation, you can grant options more regularly and ensure employees are able to benefit from your share scheme right away.


Capdesk now offers EMI, CSOP and 409A valuation services. If you’re issuing equity to employees in the UK or the US, you need a company valuation. Our in-house team works with your data to deliver accurate, audit-proof valuations and supports you throughout the process, including handling any negotiations with HMRC or the IRS.

 

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