Equity, what does it all mean?

Equity Schemes

Equity is one of my favourite benefits to be able to offer, for the candidate it offers an opportunity to boost earning potential (sometimes substantially). For the employer it helps to motivate and retain staff more than what can normally be expected from an employee just earning a salary.

But often it is a minefield where it can be difficult to fully comprehend what the equity means in pounds and dollars and how/when it can actually be achieved, hopefully this article can help anyone who is curious to understand.

The Employee Share Option Scheme, commonly known as the EMI scheme, is a fascinating concept that empowers UK companies to offer their employees a stake in the company's success. But how does it work, and what are the benefits for both employers and employees? Let's dive into this innovative scheme and decode its intricacies.

The EMI Scheme in a Nutshell

At its core, the EMI scheme allows UK companies to grant their employees the right to purchase company shares at a predetermined price. It's a win-win situation: employees get the chance to buy shares at a potentially lower price, and companies can incentivize and retain their top talent.

Here's a simplified example to illustrate how it operates in practice:

Imagine Company B decides to grant its key employee, Sarah, the right to purchase 500 shares at a predetermined price of £2 per share. Sarah waits until the company's share price rises to £4 per share and decides to exercise her share options. She buys the shares for £1,000 (£2 per share * 500 shares) and chooses to hold onto them.

A year later, Company B's share price has surged to £5 per share. Sarah decides to sell her shares for £2,500 (£5 per share * 500 shares), making a profit of £1,500. While it's certainly a financial win for Sarah, it's worth noting that she will be required to pay capital gains tax on the £1,500 profit she earned.