It can be stressful to leave a company that you have share options in when you don't know if you're keeping the options or if you're losing them.
If you are awarded enterprise management incentives, it is important that you understand how enterprise management incentives are offered in circumstances of leaving a job. If you get it wrong, you might miss a deadline or be hit with an unexpected tax bill.
Even if you're just starting to understand how equity compensation works, this is a starter's guide to what happens to your options when you leave.
What Occurs if You Break Out of an EMI Option?
Your vested EMI options are likely to be due within 90 days of leaving the job and any unvested options may be forfeited.
The status of good or bad leaver will determine whether you will keep the favorable treatment in terms of tax, so that should be specified in your option agreement. An event of disqualification for EMI is to be separated from work.
When You Leave, What Happens to Your Unvested vs Vested EMI Options?
The first thing you need to do is to find out how many options are vested and therefore, yours to exercise.
Vested shares: These shares are ones that you have gained the right to purchase. They are generally allowed to use them, but only within a tight time frame after departing.
Options: These are still unvested. In most schemes, they expire at the time of departure.
The details of what you can and can't do are contained in your EMI option agreement, so before you resign, read the agreement carefully.
The 90-Day Rule: After the Leave, EMI Options Are Exercised
After leaving the room the clock begins to run. The vested options can be exercised within 90 days, while retaining the EMI tax benefits.
Leaving Is an EMI Disqualifying Event
An employee who stops their work is considered to be a disqualifying event for EMI. Exercising within 90 days will maintain the tax treatment that is more favorable on the value created up to the time of leaving.
After 90 days, exercise the shares, any appreciation in the share value between leaving and exercising will be taxed as income tax rather than the more favorable EMI tax treatment.
Good Leaver / Bad Leaver Rules
Many schemes split leavers into two groups, and this is the determining factor in whether or not you have options.
Good leaver: Typically redundancy, retirement, ill health or via agreed terms. Options that are vested do not go away upon the departure of a good leaver.
Dissatisfied employee: Usually, someone who has decided to resign or been demoted because of poor behavior. Bad leavers risk the loss of all rewards.
Bad Leaver Forfeiture of EMI Options
If you're a bad leaver as defined by your agreement, the company may try to coerce you to give up your options, even vested ones.
Forfeiture operates much the same as if you were leaving a job under other share schemes' forfeiture rules, so you should be aware of what your leaver status will be before you give notice to your employer.
Tax on EMI Options on Exit from a Job
The thing that most people are afraid of is tax, so let's hold it simple.
EMI Options Tax Treatment and Capital Gains
Normally, you would not pay any income tax at the time of exercise if you had the options granted at market value (as long as they are within the 90-day time limit).
Rather, you'll be liable to pay capital gains tax on the profit only when you buy and sell them later. If you're not sure what the numbers look like in your case, you can crunch the numbers to see what your EMI options might be worth before you decide.
Business Asset Disposal Relief on EMI Shares
A reduced CGT rate on the sale of shares qualifies if the share is a business asset disposal relief. Fortunately, the qualifying period is from the time the option is awarded, not exercised.
Frequently Asked Questions
When I lose my job, will I lose my EMI options?
This depends on the agreement you have. Unvested options are typically lost, but vested options may be exercised within 90 days of leaving.
What is the 90-day "rule" for EMI options?
Leaving a job is a disqualifying event, and you typically have 90 days to exercise vested EMI options without losing the tax benefits. If not taken advantage of within the window, further gains could be subject to income tax.
Does one pay tax on exercising EMI options post-exit?
Normally, no income taxes are owed on exercise if exercised at market value within 90 days. Capital gains tax will be charged when you sell the shares and only on the capital gain.
What is the difference between a good leaver and a bad leaver?
A good leaver, for example, due to redundancy or ill health, typically keeps vested options. They may be forfeited altogether in a bad-leaver termination for irregularities. Please verify the precise meanings in your EMI option agreement.
If I lose my job due to a redundancy, can I use my EMI options?
Usually yes. Usually, redundancy is considered a good leaver event, and vested EMI options can be exercised within 90 days of the event. Check scheme rules to ensure.