EMI valuations: actual and unrestricted market value

An EMI option relates to a defined class of shares. Before valuing that class, the valuer needs the full capital structure, option terms and the rights of existing investors. A recent funding valuation can be relevant, but the investor’s preferred shares may not have the same economics as the employee’s ordinary shares.

A cap table should include the securities and rights that can change how value is distributed, not only issued ordinary shares. Existing options, convertible instruments, preference shares and proposed option-pool changes can affect the employee’s economic participation. The exercise price and number of options are part of the grant design, but they do not by themselves establish the market value of the underlying shares.

Consider a company with recent preferred investment. The investor may receive priority on an exit, conversion rights or other protections unavailable to an employee shareholder. Dividing a headline post-money valuation by a fully diluted share count can ignore that allocation. The valuer should examine the transaction terms, the date and the progress since investment. The starting company value needs to reconcile to the security actually being valued, with any allocation method and its assumptions explained. The same discipline applies where there is no recent funding: the absence of a transaction price does not justify an arbitrary employee-share discount.

Reference framework:[5] IPEV

Actual market value reflects the applicable restrictions on the shares. Unrestricted market value applies the statutory treatment without those restrictions. Restrictions should not be confused with every commercial risk affecting the business. The company’s underlying performance and the economic rights of the class remain relevant to the analysis.

The distinction requires analysis of relevant restrictions under the employment-related securities rules, not a general removal of all risks. The unrestricted analysis does not convert a small private company into a liquid listed business or assume that commercial uncertainty disappears. Investor preferences and participation rights are features of class economics that need to be distinguished from restrictions whose effect is addressed by the statutory treatment.

Leaver clauses, compulsory transfer arrangements and limits on disposal should be read in full, including how the transfer price is determined. A clause can have different implications depending on its trigger and operation. AMV and UMV may differ, but their relationship should follow the rights and applicable assumptions rather than a standard percentage. The legal and tax team should confirm the statutory interpretation; the valuer then explains the financial effect on the security. A submission should make both the commercial valuation and the treatment of restrictions traceable instead of presenting two unsupported numbers.

Reference framework:[2] HMRC ETASSUM58010

Financial statements, current trading, forecasts, cap tables, articles and recent transactions allow the valuation to be reconciled to the security awarded. A preference waterfall may need to be modelled explicitly. The report should show how business value is allocated between classes rather than merely applying a blanket employee discount.

The financial evidence should be consistent with the valuation date. Forecasts should reconcile to current trading and distinguish contracted revenue, recurring business and less certain pipeline. Cash balances and debt must be considered when moving from operating value to equity value. For early-stage companies, the funding runway and the need for further capital can materially influence the assessment; a revenue projection alone does not capture dilution or delivery risk.

Where preference rights are significant, examine the allocation at different possible exit values. Scenario methods or option-based techniques may be appropriate depending on the business and terms, but assumptions about timing, volatility and outcomes require support. A complex model cannot compensate for incomplete legal documents. Recent secondary trades, earlier grants and investor prices should be assessed for comparability rather than combined mechanically. Keep the valuation workings, supporting financial information and the final rights documents together so that HMRC or another permitted reader can understand how the submitted values were reached.

Reference framework:[3] HMRC SVM110050[5] IPEV

HMRC publishes guidance for obtaining a share-scheme valuation, including submission procedures and the conditions of its agreement. Check the current guidance and the actual agreement letter for timing. A material event before grant can require reassessment. Agreement of a value does not establish that the company or employee satisfies all EMI eligibility conditions.

An application should use the current HMRC process and include the information required by that process. The published guidance and the actual agreement letter should be checked for the relevant validity conditions, rather than relying on an old template or a general statement that an agreement lasts indefinitely. The scope concerns the value submitted on the stated facts; it should not be described as HMRC approval of the whole incentive scheme.

Between submission and grant, a financing round, sale discussions, significant trading development or changes in rights may alter the evidence. The advisers need to consider whether the original assumptions remain applicable and whether further contact with HMRC is necessary. The mere existence of an agreement letter does not resolve a material change in circumstances. Record what changed, when it became known and the reasoning for the action taken. This chronology is particularly important where a grant is delayed or the final option documents differ from those originally provided to the valuer.

Reference framework:[1] HMRC[3] HMRC SVM110050

Tax advisers and solicitors should confirm qualification, option documents, notifications and any elections. Keep the final granted terms consistent with the terms valued. The valuation date, submitted evidence and grant date should be retained together in an audit trail. This article is technical information, not an individual tax opinion.

Separate the valuation workstream from scheme qualification and implementation. Company eligibility, employee eligibility, grant documentation and reporting obligations are legal and tax questions requiring their own review. The option terms need to match the shares and restrictions valued; a late change to the class, leaver arrangements or participation rights can undermine the relevance of the earlier report.

Restricted securities can also raise questions about elections under section 431 of ITEPA 2003. Whether an election is relevant, its effect and the required process must be confirmed by the tax adviser; it is not a generic recommendation to make an election for every option arrangement. The valuation file should identify its purpose and not be reused automatically for another tax or accounting measurement. A share-based-payment accounting assessment, for example, may involve a different measurement question from the market value of the underlying security submitted for EMI purposes. Clear coordination prevents one number from being mistaken for several different answers.

Reference framework:[1] HMRC[4] ITEPA 2003, section 431

Consider a purely hypothetical company with total equity value of £4m and an investor class entitled to receive the first £2m of sale proceeds under the assumed terms. If those terms operate as a simple priority without additional participation or conversion, the residual £2m is what remains for the ordinary class in that particular exit scenario. A £4m headline does not mean every class participates proportionately in that amount.

Real arrangements can be more complex. Conversion choices, participation caps and different exit values can change the outcome, so a single waterfall at today’s company value is not necessarily a complete class valuation. The example explains the allocation issue; it is not an AMV or UMV calculation or a recommended scheme structure. The valuer must assess the actual terms, uncertainty and appropriate technique before arriving at market values for the security under option.

Assemble the financial and legal evidence before asking for a valuation agreement. A clean chronology should identify the valuation date, submission, correspondence, material events and grant. If the documents change, preserve the versions so that the parties can see which terms were assessed. Consistent record-keeping is more useful than an unsupported statement that the grant price was “agreed”.

Owners should ask for an explanation they can understand: the company-level conclusion, how rights allocate value, how relevant restrictions affect AMV and UMV, and the assumptions that may need reassessment. The objective is a defensible evidence trail, not a promise of HMRC acceptance or a guarantee of tax treatment. Specialist advice remains necessary for qualification, implementation and ongoing compliance.

• Current articles, complete cap table and proposed option documents.
• Recent investment agreements and any secondary-share transactions.
• Accounts, current trading, forecasts and funding requirements.
• AMV/UMV workings, correspondence and final grant chronology.

Reference desk

Sources & further reading

Legislation states the legal provisions; HMRC manuals describe HMRC’s guidance. Professional standards and research guides inform valuation practice. Illustrations and commercial checklists above are explanatory analysis, not prescribed legal formulas or market benchmarks.

1. [1]HMRC — Get a share scheme valuation
2. [2]HMRC ETASSUM58010 — Market value of shares
3. [3]HMRC SVM110050 — Agreeing EMI valuations
4. [4]ITEPA 2003, section 431 — Restricted securities elections
5. [5]IPEV — Valuation Guidelines

This article provides general technical information, not legal, tax or investment advice. Its application depends on the facts, the valuation purpose and rules in force at the relevant date. A reference to a professional body does not imply XVAL accreditation or endorsement. All numerical examples are hypothetical, not XVAL fees, client results or market evidence.