Many start-up companies would like to incentivise their employees and an EMI scheme for the award of options is an ideal way to do this. We assist clients in obtaining Advance Assurance and agreeing valuations with HMRC.
What’s first?
For early-stage companies, the process of valuation will sometimes lead to us submitting a valuation on the basis that the shares are worth no more than their nominal value due to negative retained earnings, net liabilities and a lack a high confidence forecasting.
Funding options.
This process becomes more complicated if the company has undergone a recent funding round, with shares issued at a premium, as is commonplace. The funding may have brought the company into a net asset position (as it now holds the cash from the funding) and it can represent an arms-length transaction if the investor is not connected with the company. The valuers on the HMRC team will view this transaction as an indication that the shares have value, and are unlikely to agree to a nominal valuation, preferring instead, to apply discounts to the arm’s length price.
Our recommended way
We would therefore recommend that loss-making start-up companies consider getting their EMI scheme in place before any external funding is considered. It is important to note that,once a valuation has been agreed by HMRC it is valid for 90 days, but on the basis of the facts disclosed at the time the valuation was sought. This means that any funding rounds that occur (or are even “actively contemplated”) after valuation but before the grant of the options will negate the valuation.
