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EMI options, growth shares or both?

By Nigel Watson

8 Sep 2026 8 min read

For an eligible company wanting to implement an employee equity incentive solution, EMI is usually the obvious starting point. It offers unusually favourable tax treatment, requires no investment at grant and means employees do not become shareholders until exercise.

Growth shares do something different. They can concentrate management's participation in a particular part of the equity outcome - for example, value above an investor hurdle - without giving management the same participation in value already created.

Sometimes, though, you want both.

A genuine growth-share class may have relatively low value today because its rights are contingent on sufficiently high future equity values. EMI can therefore be used to deliver meaningful exposure to those outcomes within the available EMI limits.

But that is not valuation arbitrage. The shares are worth less because management gives up other economic outcomes and may receive nothing at all. Their valuation must capture the contingent upside they retain.

And once a growth-share hurdle sits underneath an option exercise price - perhaps with a performance condition on top - those elements need to be designed together. Otherwise, a sensible incentive can become accidentally over-geared.

EMI and growth shares are not really alternatives

A typical conversation starts with: should we use EMI options or growth shares?

I think that slightly misses the point.

An EMI option primarily determines when the employee becomes a shareholder. The employee receives an option now but does not acquire the shares until exercise. Assuming the statutory conditions are satisfied, an option granted with an exercise price at least equal to actual market value at grant can normally be exercised without an income tax or NIC charge on subsequent growth.

The employee has therefore locked into today's value without funding the investment today. If the investment ultimately makes no sense, the option can simply lapse.

Growth shares primarily determine which part of the company's value the employee participates in.

Suppose a company is worth £20 million. Existing shareholders might want management to participate only in value above £30 million. A growth-share class can be designed to give management, say, 10% of equity proceeds above that hurdle.

A direct acquisition of growth shares means the employee becomes a shareholder immediately. That brings valuation and the employment-related securities rules into play. Where the shares are restricted, the section 431 analysis also matters. If the objective is to put subsequent normal commercial growth into the capital gains regime, the acquisition taxation and restricted-securities position needs to be dealt with appropriately. Other employment-related securities provisions can still apply.

The more useful question is therefore: what economic exposure are we trying to create, and when do we want management to put capital at risk?

Why ordinary EMI should usually come first

If ordinary shares already produce the economics the shareholders want, EMI is difficult to beat.

The employee does not fund the shares at grant, can defer the investment decision until exercise and can simply allow the option to lapse if the investment never becomes worthwhile. Because there is no shareholder until exercise, leavers can often be dealt with through the option itself rather than through compulsory share transfers.

EMI also offers unusually favourable tax treatment for both employee and employer. Subject to the statutory conditions, much of the growth above grant-date value can ordinarily be realised without an employment income tax or NIC charge, and there can be a corporation tax deduction on exercise. EMI also benefits from particularly favourable BADR rules.

As discussed in an earlier EMI piece, the increase in the EMI exercise period from ten to 15 years is significant for reasons extending beyond simple longevity. Incentives can now remain part of the capital structure for much longer, making questions of dilution, liquidity, leavers and incentive design increasingly important.

If the intended bargain is simply that management participates in the growth of the ordinary equity from today's value, an EMI option over ordinary shares may already achieve the objective without additional complexity.

The interesting cases are the ones where it does not.

The valuation case for EMI over growth shares

The combination becomes more interesting where management should participate disproportionately in particular future outcomes.

Suppose investors want management to receive a defined percentage of equity proceeds above a substantial hurdle. Growth shares can encode that bargain directly into the capital structure. Because those rights are contingent, the shares may have relatively modest value today. They may receive nothing at lower exit values but become significantly more valuable if the business performs strongly.

That can interact usefully with EMI.

For EMI purposes, the limits are measured by reference to unrestricted market value. A genuine growth-share class may therefore allow a given amount of EMI capacity to support substantially greater participation in future upside than would be possible using ordinary shares.

The attraction is obvious but there is an important constraint. Growth shares do not create cheap equity. They create different equity.

Giving management more of the upside should itself increase the current value of the growth shares. A defensible valuation must reflect that "hope value". The opportunity is not to suppress value. It is to reallocate participation between different outcomes, with EMI acting as a tax wrapper around a properly valued contingent interest.

The distinction between genuine class rights and restrictions is also important and the valuation must withstand scrutiny.

There are structural gates too. Not every instrument described as a growth share will qualify for EMI and, where there are EIS or SEIS investors, introducing a subordinated class requires separate analysis.

Basically, the capital structure has to work before the tax wrapper can.

The hurdle and the exercise price are cumulative

Once EMI is put over growth shares, the growth-share hurdle, exercise price and any performance condition need to be considered together.

They do different things. The hurdle defines the economic rights being acquired. The exercise price is what management pays for them. A performance condition determines whether management is allowed to acquire them at all.

But their effects accumulate.

Suppose management is entitled to 10% of equity proceeds above £30 million and the growth shares are worth £50,000 when the option is granted. A £50,000 exercise price means management needs £30.5 million of equity value before exercise becomes worthwhile. That is a second breakpoint, but a relatively modest one.

By contrast, a £500,000 exercise price would move the effective break-even point to £35 million. Add a performance condition and management may face a further gate before receiving any value.

The option holder does, however, get something valuable in return: deferred funding, no capital at risk until exercise and the ability to walk away altogether. Direct ownership involves immediate investment and exposure to downside, but that may be entirely appropriate depending on the intended economics.

Each feature may be entirely defensible on its own. The question is whether their combined effect still reflects the intended incentive bargain.

This is also another version of a point I have made before about growth shares needing shock absorbers. A hurdle which works on day one can become misaligned as funding, dilution, the capital structure or expected exit horizons change. Putting the shares under an option does not eliminate that risk. It simply introduces another fixed component into the payoff.

Nor can it necessarily be repaired safely later. Changes to hurdles, share rights or fundamental option terms can themselves create valuation, tax or EMI complications.

The best answer is to model the whole arrangement before it is drafted.

At a handful of realistic equity values, what does management actually receive after the waterfall and exercise price? How does that compare with investors? And at what point does management begin to receive value that is genuinely meaningful rather than merely positive?

Those are incentive-design questions before they are drafting questions.

When EMI capacity runs out

There is, of course, another version of “both”.

A participant may already have the maximum sensible EMI exposure or be unable to receive further qualifying options. The £250,000 individual limit is not necessarily a fresh pot on each grant: existing EMI and relevant CSOP options, together with the statutory three-year rules, can affect capacity.

The instinct is often to use an unapproved option for the excess, which may be right, but it should not be automatic.

A direct growth-share investment can instead provide further exposure to future value. If acquired on the appropriate tax basis, subsequent genuine commercial growth can potentially fall within the capital gains regime, subject to the wider employment-related securities rules.

Direct growth shares do not replicate all of EMI's advantages. They have no equivalent BADR shortcut and many management holdings will fail the ordinary 5% requirements.

There is an employer-side comparison too. An unapproved option can generate a corporation tax deduction on exercise and, where shares are readily convertible assets, PAYE and employer's NIC can arise. A direct growth-share investment at full value normally gives no equivalent deduction on subsequent capital growth, but genuine capital growth should not attract employer's NIC either.

So the choice shifts value and risk between employee, company and the Exchequer.

The optionholder gets deferred funding, limited downside and the ability to walk away. A direct shareholder may instead have shareholder rights and distributions, avoids the risk of a later EMI disqualifying event and is not constrained by the EMI exercise period.

So “EMI plus growth shares” can mean two different things. One is vertical: EMI options over growth shares, using EMI to wrap a contingent interest in a particular part of the equity outcome.

The other is horizontal: EMI for one layer of participation and direct growth shares alongside it where further EMI participation is unavailable or inappropriate.

Both can work. They just solve different problems.

Start with the payoff

As always, I would start with the economics and work backwards.

If management should simply participate in ordinary equity growth from today's value, ordinary EMI is usually the starting point.

If management should participate differently across different equity outcomes - perhaps receiving nothing below an investor hurdle but a larger share above it - a genuine growth-share class may be more appropriate.

Putting EMI over that class can then be powerful. EMI wraps the properly valued contingent interest, while the option defers management's investment and limits its downside.

But none of that changes the underlying economics. Lower current value reflects rights that are worth less today. More participation in high-value outcomes increases that current value. The valuation has to capture both.

And once an option is placed over the shares, the hurdle, exercise price and any performance condition operate together.

The question is therefore not how much equity can be squeezed into EMI. It is how to allocate management's participation across different outcomes, value that participation properly and then use EMI where it genuinely improves the structure.

Get those steps in the wrong order and a tax-efficient incentive can still be a poor incentive.

At Burges Salmon, we advise companies, founders and investors on the design and implementation of EMI options, growth shares and wider management equity arrangements. That means looking beyond the tax treatment of each instrument in isolation.