When someone with an Enterprise Management Incentive (EMI) scheme leaves a company, there are three main possibilities: the options lapse, they are kept for a future event such as an exit, or they are exercised. Each choice has implications for tax, reporting, company culture and, most visibly to investors, your cap table. Founders and finance teams need to act quickly while managing risk and preserving the scheme’s integrity.
This guide is written for busy CEOs, pragmatic finance leads, and in-house counsel handling leavers for the first time or dealing with complex situations. It covers how to categorise leavers, decide outcomes, manage deadlines, and apply discretion correctly.
Legal guidance is essential throughout this process to ensure compliance with plan rules, protect EMI status, and reduce the risk of disputes, and our EMI scheme solicitors can help you through every step of the way.
Contents:
- Understanding what happens when someone leaves an EMI scheme
- Gathering the EMI paperwork and applying discretion
- Vested and unvested options
- Categorising EMI leavers and why labels matter
- How EMI leavers are handled in practice
- What happens if an employee changes employers or roles within the group?
- Managing deadlines, funding and illiquid shares
- Cross-border moves and competitor exits
- Preparing for exit and avoiding common pitfalls
- When to involve solicitors
Understanding what happens when someone leaves an EMI scheme
EMI treatment depends on both the plan rules and the type of leaver. Unvested options usually lapse automatically, while vested options may be exercisable for a limited period, often 90 days, or retained until a specific event, such as a change of control. From a tax perspective, leaving is normally a disqualifying event. Favourable EMI tax treatment is preserved only if the option is exercised within 90 days; after that, some or all of the gain becomes employment income depending on the plan rules.
Founders also need to keep an eye on annual ERS returns, which are due by 6 July following the tax year. For grants made on or after 6 April 2024, the grant notification deadline has also moved to 6 July following the end of the tax year. Grants before that date still follow the historic 92-day rule. Instructing lawyers at this stage helps ensure all filings are completed correctly, deadlines are met, and your documentation is defensible in case of scrutiny.
You can find out more about the difference between exit based, time and performance based EMI schemes in our guide.
Gathering the EMI paperwork and applying discretion
Before making any decisions about a leaver, gather the full paper trail. This includes the EMI plan rules and any schedules, individual option agreements, board or shareholder resolutions, and valuation or grant notification evidence.
Board or remuneration committees may hold discretion over certain outcomes, in which case it is important to apply it consistently and document all decisions.
Keeping your cap table up to date as soon as options lapse, are exercised, or carried forward is also essential. Messy records can raise concerns for buyers and complicate fundraising or exit processes.
If you’re weighing up whether to manage your EMI scheme entirely on an online platform, through a solicitor, or by combining the two, read more in our online platform vs solicitor vs hybrid article.
Vested and unvested options
Vesting generally means the option holder has earned the right to exercise the option under the plan, subject to any exercise conditions. Unvested options usually lapse automatically. Vested options are typically exercisable for a short window, often 90 days, or may be held over until a specified event if the plan allows.
Categorising EMI leavers and why labels matter
Leavers may be categorised as good, bad, or very bad, which guides how options are treated and promotes fairness and consistency.
Good leaver: often involuntary such as redundancy, long-term ill health, death, sometimes mutual agreement by operation of board discretion. Unvested options lapse; vested options are usually exercisable within a defined window.
Bad leaver: resignation, especially to join a competitor. Unvested options lapse; vested options often have a short window or lapse in exit-only schemes.
Very bad leaver: misconduct, fraud, confidentiality or IP theft, team poaching. Loss of all options is common.
Labels should be applied carefully and aligned with enforceable restrictive covenants. Legal guidance ensures evidence and process are robust, reducing the risk of grievances or tribunal claims.
How EMI leavers are handled in practice
When options lapse, the board should minute the decision, provide written notice to the leaver for good practice even if this is not legally required, and update any option register and cap table. Lapses of EMI options must also be reported in the ERS annual return by 6 July. Common mistakes include failing to update records promptly.
If options are retained for a future event, the board should confirm the leaver category, record the retention in minutes, specify the end date or trigger, and in certain circumstances restate any covenants. Any later exercise must still be reported in the ERS return.
When options are exercised, steps include preparing board minutes, exercise notice, collecting the exercise price, issuing shares, updating registers, and considering PAYE/NIC if the shares are readily convertible assets. No income tax or NIC applies if EMI conditions are satisfied and there is no disqualifying event, or if exercised within 90 days. After 90 days, part of the gain becomes employment income.
What happens if an employee changes employers or roles within the group?
If your employee is transferred to an overseas company, you might allow them to exercise their options, particularly if there may be adverse tax consequences because of the move.
If your employee is moving to the US, you need to be particularly careful as there can be adverse tax consequences. If your employee changes roles, the key thing to watch out for is that they continue to meet the EMI working time test.
Managing deadlines, funding and illiquid shares
Plan operators must observe key deadlines: enable exercising within 90 days of leaving to preserve tax advantages, file ERS annual returns by 6 July, and meeting grant notification deadlines. Missing reporting obligations can lead to penalties.
Funding exercises in private companies can be challenging. Options include employee loans or bonuses, or aligning exercise with a buyer’s timetable in a secondary sale. Planning the PAYE and NIC implications in advance is essential, and legal advice helps structure these arrangements correctly.
When shares are illiquid, it is important to clearly explain restrictions, information rights, pre-emption rights, and transfer processes as part of the exercise process. Lawyers can ensure communications are both clear and legally robust.
Cross-border moves and competitor exits
If a leaver reduces their working hours below the requirement, this is usually a disqualifying event triggering the 90-day clock. Cross-border moves can also change PAYE/NIC obligations. When someone leaves for a competitor, the outcome should align with enforceable covenants.
When an employee leaves for a competitor, it’s important to have a restrictive covenant in place. You can read more about them in our restrictive covenants legal guide.
Preparing for exit and avoiding common pitfalls
Buyers scrutinise option registers, leaver files, vesting calculations, HMRC grant notifications, and ERS returns. Common red flags include undocumented discretion, ambiguous leaver labels, missed filings, and PAYE errors. A pre-exit EMI health check by solicitors can prevent price reductions and last-minute stress at the closing table.
A clean and defensible leaver process involves gathering paperwork, categorising the leaver, board minuting the decision, calculating vesting, lapse and exercise windows, communicating terms and covenants, managing exercise and funding, filing returns, and updating registers and the cap table.
Some issues can arise with EMI during a business exit, which we discuss in this guide.
When to involve solicitors
You should seek legal advice if a leaver’s status is unclear, there is an overseas move, funding is an issue, you are fundraising or heading for exit, or you are unsure how to preserve EMI tax advantages and meet reporting obligations.
Our specialist EMI scheme solicitors can review your plan, confirm leaver outcomes, model tax and PAYE implications, and prepare all communications and filings.
If you want to learn more about EMI, from the qualifying criteria to the registration process, and how it could benefit you in our article: FAQs: setting up an EMI scheme.
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