A brief overview of the Vestd EMI option agreement

One of the (many) benefits of using Vestd for your EMI scheme is our option agreement. Rather than spending thousands on lawyers to draft your own EMI agreement, you can use ours which has been reviewed by multiple law firms and has the flexibility to suit the needs and goals of your EMI scheme. 

This article will provide a brief explanation of each of the clauses in the agreement to help you understand what they mean for your company and employees. 

Clause 1 - Interpretations

Most of the defined terms used in the Vestd EMI option agreement can be found here, although some terms may be defined in specific provisions instead. 

If you’ve chosen to incorporate the concepts of good and bad leavers when setting up your scheme, the definitions of Bad Leaver Event and Good Leaver should be noted as this will affect how you will treat an employee’s options should they leave the company. 

A Bad Leaver Event encompasses gross misconduct, a material breach of the employee’s employment contract or the employee being convicted of a criminal offence. A Good Leaver, on the other hand, is an employee who leaves the company for any reason that is not a Bad Leaver Event, such as for another job, retirement, ill health or death. 

Exit Event is another term that is important to understand as options may be exercised upon the occurrence of such an event. An Exit Event includes: 

• Asset Sales (the sale of all/substantially all of the company’s property)
• Share Sales (a change in ownership of shares carrying more than 50% of the total voting rights in the company)
• Listings (full or partial) on a recognised investment exchange

Clause 2 - Grant of Option

This clause states that the company is granting the employee the option as detailed in the agreement. There is reference to £1 being taken by the company from the employee’s next payroll. This allows the agreement to be electronically accepted using the Vestd platform, rather than it needing to be signed as a deed.

Clause 2 goes on to reference legislation relevant to the grant of EMI options and the limits that apply to these shares and options.

Clause 2.7 states that if the option ceases to qualify for EMI (for example if the employee leaves the company) it may continue and be treated as an unapproved option.

Clause 2.8 contains the working time commitment that is required by law under the EMI scheme. This states that the employee works for the company for at least 25 hours per week or, if less, at least 75% of their total working time. 

Under the law, time off for things such as parental leave, illness and reasonable holiday leave will be counted as working time and therefore will not negatively affect this requirement, but things like sabbaticals will.

Clause 3 - Exercise of options

Clause 3 sets out how the options can be exercised. It states that the option can be exercised in whole or in part during the Option Period (which is defined in the Schedule) to the extent that the Vesting Criteria (also found in the Schedule) is satisfied. 

It goes on to state that subject to clauses 6.1.2 and 6.1.3, the option can also be exercised with the consent of the board within 90 days of a Disqualifying Event to the extent that the Vesting Period is satisfied. 

To exercise the option, the employee must give written notice to the company specifying how many of their options they intend to exercise. This notice must also be accompanied by payment for the relevant shares and, if relevant, a deed of adherence making them party to the company’s shareholder agreement. 

Once all of this has been received by the company, they must issue the shares to the employee within 30 days. The company may require the employee to enter into an S.431 election upon issue of the shares. More information on S.431 elections can be found here.

It’s important to note that shares issued due to an exercise of options are treated the same as any other share in that class.

Clause 4 - Exit Event

For any type of Exit Event, the company is required to give the employee prior written notice. This notice defaults to 14 days when setting up your scheme on Vestd, but you can change it if you wish.

Once notice has been given, the option holder can submit their exercise request at any time prior to the Exit Event, but the exercise will only happen immediately before the completion of the Exit. 

Clause 4.2 allows for a cashless exercise, which allows the employee to exercise their options without paying the exercise price upfront. Instead, they will sell some of the shares they acquire upon exercise back to the company and use the proceeds to pay the exercise price. 

This clause is particularly useful when an employee may not be able to fund the exercise out of their own pocket.

Clause 4.3 allows the company to require the employee to enter into a binding commitment that they either will or will not exercise their options at the point of Exit. 

If the employee fails to provide such assurances, the option will lapse entirely. This provision ensures that the company is able to comply with any requirements it may be subject to under the Exit, and also avoids the risk of future disputes of how the options may be handled. 

It should be noted that unless the company decides otherwise, if an Exit Event occurs, the employee can only exercise their options if they agree to sell the shares they acquire upon exercise as part of the Share Sale. The employee will appoint a director of the company to execute the necessary paperwork. 

The obligation to enter into this power of attorney avoids the risk of the employee not signing documents for any reason. An obligation to enter into a power of attorney rather than including the power of attorney itself is used to avoid the need to sign the agreement as a deed.

Clause 5 - Articles of Association

Any shares issued as a result of the exercise of options will be subject to the company’s articles and any applicable shareholders’ agreement, including any restrictions therein.

Clause 6 - Lapse of Options

Clause 6 sets out when an option will end (or “lapse”). The exact wording of this clause in your agreement depends on the leaver terms you chose when setting up the scheme; so the outcome when someone leaves will differ too.

Default lapse triggers (Clause 6.1)

Regardless of the leaver setup chosen, an option will lapse:

• at the end of the Option Period
• immediately following the completion of an Exit Event (where applicable)
• if the participant loses legal or beneficial ownership of the option
• after a set period following the participant leaving the company; usually 16 weeks (more on this below)

What happens when someone leaves (Clause 6.2)

The wording of Clause 6.2, and what happens to vested and unvested options on leaving, depends on the leaver terms selected.

Leaver setup chosen	Vested options	Unvested options	Role of the 16-week period
Lose everything	Lapse on leaving	Lapse on leaving	Doesn’t apply; the option ends immediately
Exercise within 90 days (Good Leaver)	Must be exercised within 90 days of leaving, otherwise lapse	Lapse on leaving	Doesn’t apply; the 90-day window is the deadline
Keep vested options (Good Leaver)	Retained automatically and exercisable in line with the agreement	Lapse on leaving	Doesn’t apply to retained options
Board discretion	Cease to be exercisable on leaving (subject to terms of agreement); the Board decides treatment within 16 weeks	Same as vested	Acts as a decision window; options lapse automatically if no Board decision is made

 

A note on the 16-week period

The 16-week period is a backstop, not a universal rule. It exists so options don’t remain open indefinitely where the agreement relies on Board discretion or where no specific outcome has been defined. Where the agreement already sets a specific outcome (e.g. lose everything, retained vested options or a fixed exercise window), that outcome takes precedence and the 16-week period doesn’t apply.

 

Where Board discretion does apply and the Board decides how to treat the leaver’s options, it can choose how many options the participant retains. However, the Board cannot change when the option may be exercised unless the agreement specifically anticipates such a change — for example, a Good Leaver provision permitting exercise on cessation of employment in an exit-only scheme. Changing when the option may be exercised without that anticipated provision risks HMRC treating it as a material change, which would disqualify the EMI agreement. See our guide on changing the conditions of an EMI option agreement for more detail and links to HMRC’s guidance.

Death (Clause 6.3)

If a participant dies during the lifetime of the option, their executors or personal representatives can exercise the vested portion of the option within 12 months of the date of death. Any options that are unexercised after this period will lapse.

Bad Leaver Events (Clause 6.4)

Where your scheme includes good and bad leaver provisions, Clause 6.4 covers what happens on a Bad Leaver Event: the option will immediately cease to be exercisable and will lapse.

Other lapse triggers (Clause 6.5)

The option will also lapse if:

• the participant attempts to assign the option (which is prohibited under Clause 7)
• the participant becomes bankrupt
• the company is subject to a compulsory winding-up

FAQs

Can options be kept beyond 16 weeks?

Yes — where the agreement provides for it. The “Keep vested options” setup retains vested options in line with terms of the agreement, and the “Exercise within 90 days” setup gives a fixed window that ends before the 16-week mark. The 16-week period only applies as a backstop under Board discretion.

Must the Board always act within 16 weeks?

Only where the agreement uses Board discretion. In every other setup, the outcome is defined by the agreement itself and no Board action is required.

How does the 90-day exercise window interact with the 16-week period?

They don’t overlap. The 90-day window applies in the “Exercise within 90 days” setup as the deadline for exercising vested options. The 16-week period applies in the Board discretion setup as the decision window. An agreement typically uses one or the other, not both. The 16-week provision may still appear in the agreement but does not apply in practice where a shorter exercise window is defined.

Is “Keep vested options” automatic or discretionary?

Automatic. If your scheme uses this setup, vested options are retained on leaving without the Board needing to decide.

Which clause takes precedence?

The leaver-specific outcome in the agreement always takes precedence over the 16-week backstop. The backstop only applies where there is no defined outcome — i.e. under Board discretion.

 

Clause 7 - Rights not assignable

With the exception of the employee dying, the option agreement cannot be assigned or transferred to a third party. If this is attempted, the option shall lapse.

Clause 8 - Variation of share capital

In the event of a consolidation or subdivision of the share class in which the options are granted, the number of options and associated pricing within the option agreement will be adjusted to reflect this. This will not be seen as a change to the terms of the agreement for EMI purposes. 

Clause 9 - Terms of employment

Clause 9 states that unless there is anything contradictory in the employment contract, the option does not form part of the employee’s remuneration or benefits. 

Similarly, the rights and obligations under the employment contract are not affected by the option agreement and the employee has no right to receive compensation for any loss suffered in relation to the options should their employment contract be terminated. 

Clause 10 - Nature of Participation

Clause 10 relates to the benefits associated with EMI options. It explains that the company has no duty or obligation to the employee if a disqualifying event or anything that otherwise causes the option to be disqualified occurs. 

In the event that an option does become disqualified the employee is unable to bring a claim.

Clause 11 - Taxation

It is the employee, not the company, that is responsible for any taxation due on the grant or exercise of the option. The company can recover any of this tax that it pays from the employee. It should be noted that in addition to clause 10, clause 11 states that the company is not liable to the employee if the option ceases to qualify for EMI.

Clause 12 - Notice

Where the agreement requires that either party give written notice, this must be done in writing, and can be done via post, email or the Vestd Platform.

Clause 13 - Entire Agreement

Clause 13 states that it is only this agreement that relates to the options, and that any previous agreements or discussions do not form part of the agreement.

Clause 14 - Modifications

The company’s board can make amends to the agreement by giving written notice to the employee. However, if the changes are disadvantageous to the employee they can only be made with the employee’s written consent. 

It is important to keep in mind that if HMRC considers an amendment to be a material change to the commercial terms of the agreement, then making such amendment will be treated as if the existing agreement is cancelled and a new agreement is created.

As a result, all of the timings will restart from the date the amendment is made, and factors such as exercise price and AMV will need to be adjusted accordingly.

Clause 15 - Data Privacy

The company will at all times comply with application data protection laws.

Clause 16 - Severability

If any of the clauses in the agreement are held to be unenforceable or void, that provision will be deemed deleted from the agreement and the parties will negotiate in good faith to put in place a replacement with a similar effect as the original provision.

Clause 17 - Governing Law

The agreement is governed by English and Welsh law and subject to the exclusive jurisdiction of the English courts.

Clause 18 - Execution

The agreement is executed once it has been accepted on the Vestd Platform.

Clause 19 - Schedule

The schedule contains key information about the options that have been granted, such as the number of option shares, the exercise price and the option period. It also sets out details of the vesting criteria and vesting schedule. 

The company can add additional clauses that will be included in the Schedule. Any additional clauses will supersede any conflicting provisions in the agreement so it is important that the company ensures these are drafted appropriately, which may require assistance from lawyers.