Key terms

A

Actual Market Value (AMV): is used to set the income tax point for the shares when they are exercised. The AMV will not be higher than the UMV but may be significantly lower as (for example) any shares offered via EMI will make up a small proportion of the company's total equity, and may not be readily saleable on exercise.   

Advance assurance: HMRC’s way of determining whether a company meets the conditions of SEIS/EIS and whether an investment will qualify for the tax benefits associated with the schemes.

Agile Partnerships™: frameworks that determine equity rewards based on agreed performance milestones.

Alphabet shares: shares of different classes and rights, often set up as eg. 'A Ordinary', 'B Ordinary', 'C Ordinary' etc.

Annual notifications: a requirement of the EMI scheme is that participating companies must submit an annual return via 'ERS' before the 6th of July each year.

Articles of Association (AOA): a document that outlines how a company is governed and operates, as agreed by the shareholders, directors and secretary.

B

BADR: Business Asset Disposal Relief, formerly known as Entrepreneurs' Relief.

Buybacks: when a company decides to repurchase its own shares, reducing the number of existing shares, increasing the value of others.

C

Capital Gains Tax (CGT): is a tax on the profit when you sell an asset that's increased in value. Shares, for instance.

Cliff: the waiting period before a recipient is eligible to receive any options. Often expressed as something like “four-year vesting with a one-year cliff.” 

Company governance: rules that determine whether or not a resolution is needed, and what majority is required. 

Company Share Option Plan (CSOP): a tax-advantaged discretionary share option scheme.

Conditional Shares: shares that are issued under certain conditions e.g. Key Performance Indicators (KPIs) that the recipient has to meet.

CoSec: a company secretarial admin.

D

Deferred shares: shares that have no economic or voting rights and are effectively worthless (typically if conditions have not been met).

Dilution: when a company issues new shares it reduces the ownership percentage of existing shares, diluting them.

Discounted option: a share option granted at an exercise price less than market value.

Dividend: a payment a company can make to shareholders if it has made a profit, usually on a regular basis.

Drag along: a clause (in our standard AOA) that forces a shareholder to sell if the majority shareholders wish to sell. See related term 'tag along'.

E

Earnings per share (EPS): a company's net profit (earnings) divided by the number of common shares outstanding.

EMI disqualifying event: in the event that an employee no longer meets EMI eligibility criteria (for example the working time declaration), then this is a disqualifying event.

Employee Relationship Securities (ERS): gifts and awards of shares in companies as a means to reward, retain or incentivise employees.

Employee Stock Ownership Plan (ESOP): in its simplest terms, a tax-advantaged option plan that allows employees to accumulate shares in a business over time.

Enterprise Investment Scheme (EIS): a UK government scheme intended to help smaller higher-risk trading companies raise finance by offering various types of tax relief to investors as an incentive.

Enterprise Management Incentives (EMI): a tax-advantaged share option scheme typically used by high-growth SMEs to incentivise talented employees to join a relatively new business.

Entrepreneurs' Relief (ER): special capital gains tax rate of 10% applicable to EMI option holders and those who have more than 5% share ownership, so long as the shares and/or options have been held for at least 24 months. ER was renamed BADR in 2020.

Exercisable options: require completion of a vesting schedule and/or performance milestones, allowing your team members to exercise their options when they become fully vested, at which point the options become shares. See 'Options'.

Exercise: the right to buy the shares at the pre-agreed price.

Exercise price: the price shares are acquired for (agreed at the grant date) when an employee exercises their share options and affects how much tax the recipient will pay upon exercise.

Exercise window: a fixed period of time where recipients can exercise their options before they 'lapse'.

Exit event: when the owner of a business transfers ownership and/or control to another company, individual or investor, usually as part of a sale or IPO.

Exit-only options: allow option holders to exercise when your business is sold, there is a change in control, or when another significant change in company structure occurs.

F

F&F: a friends and family funding round.

Forfeiture of shares: HMRC term used to describe the risk of the recipients not getting to the point of exercising their options, and therefore not becoming a shareholder, forfeiting their options.

Fully diluted: the number of shares that have been issued including (but not limited to) any outstanding or restricted shares and options reserved in an 'option pool'.

G

GDPR: General Data Protection Regulation.

Grant date: the date share options are given to an employee (i.e. the employee receives a right to acquire shares in the company).

Growth shares: real shares, issued upfront, at a hurdle rate. Technically speaking, a special class of Ordinary Shares with limited rights.

H

HCT (Historic Cap Table): A transaction by transaction history of the transference of shares.

HMRC valuation: an HMRC approved valuation that agrees share values for tax purposes. It is an essential criterion for EMI schemes.

Hurdle rate: a recipient’s share in the capital growth of the business, from the point the shares are issued, not the company’s inception. Reflecting the value the recipient adds to the business from that point onwards.

I

ITEPA: Income Tax Earnings and Pensions.

L

Lapse: the loss of a share option (i.e. the right to buy shares at the exercise price).

Leaver provisions: clauses in a shareholder agreement that outline what happens to a shareholder's equity in the event they leave the company (and under what circumstances).

Liquidity event: an IPO (when a company becomes public), a merger or acquisition, sale or purchase of a company.

Long-term Incentive Plan (LTIP): rewards employees with shares or options for achieving specific goals, usually performance-related. Commonly awarded to executives.

M

Market value: where the shares are not listed, the market value of the shares is determined by having the shares appropriately valued. Employers can agree a market value with HMRC’s Shares and Assets Valuation team for tax-advantaged schemes.

N

Nominal value: the face value of a share (e.g. £1), as determined by how the company’s share capital is denominated. The nominal value is not the same as the share’s market value.

O

Option: the right to acquire shares in the future at an agreed price, possibly subject to certain criteria.

Option pool: a percentage of the company reserved for those who have been or will be awarded options. Needs to be formally authorised by the board and shareholders.

Ordinary shares: shares that carry no special rights in the company. Ordinary shares usually carry voting rights and the right to share dividends and capital.

P

Pari passu: means "equal rights".  Technically applied to ordinary shares and describes their voting or dividend capital rights.

Pre-emption rights: when a shareholder has first rights to maintain their stake in the business.

Preferred shares: a type of shares that typically give their holders rights to specific dividends, and rights to a specific amount of the capital when winding up a company, ahead of all ordinary shareholders.

P&L: Profit and Loss.

R

RP04: a second filing of a document at Companies House that was previously delivered that may have been inaccurate.

S

Secondary market: a type of market where shares and other securities can be bought and sold. 

Seed Enterprise Investment Scheme (SEIS): offers tax benefits to investors in return for their investment in small and early-stage startups.

Share Incentive Plan (SIP): a HMRC-approved, tax-efficient, all-employee plan that companies can tailor to suit their needs.

Share price: the price it would cost to buy one share in a company. 

Shareholders' Agreement (SHA): similar to AOA, except it's a private contract between shareholders that contains additional rules and obligations. 

SoC: State of Capital.

Strike price: see 'Exercise Price'.

T

Tag along: a clause (in our standard AOA) that gives a shareholder the right to sell their shares along with the majority shareholder, in the event of a sale. Also known as 'piggyback rights'.

Taxable gains: the tax applied to the difference between the original price of the shares and the sale price.

Tranche: a portion or period of time.

Treasury shares: shares that a company previously issued and that they then reacquire.

U

Unapproved share option: a share option not granted under an HMRC approved share scheme.

Unrestricted Market Value (UMV): UMV values all the shares as if they had no restrictions and could easily be bought and sold at the prevailing worth of the company at the time.

V

VAL 231: a form that must be filled in to get an EMI valuation.

VCT (Venture Capital Trust): a company, similar to an investment trust, approved by HMRC and which subscribes for shares in, or lends money to, small unquoted companies.

Vest: the time at which a share option can be exercised.

Vesting schedule: when you award options to recipients they don’t become available to them immediately. Instead, the options go through a ‘vesting’ period and become available over time.

W

Warrants: very similar to 'options', warrants entitle the holder the right to buy shares at a set price, over a specified period of time. Warrants are more commonly issued to non-employees like investors, banks or other third parties.

Waterfall: the pecking order in which capital is distributed amongst shareholders on a winding up or exit event. The rights of each share class form the waterfall; share classes with preferential rights receive their allocation in full first, then the next tier receives their allocation in full, and so on.