Granted specialists can prepare a valuation, agree it with HMRC and register it for you. But you might want to take a different approach: you may feel comfortable doing your own valuation, you may have an existing trusted advisor who can do this for you, or you may have had a valuation prepared for another purpose.
If you’re taking the alternative approach, there are a few extra things to think about:
- a valuation for an EMI plan is normally significantly lower than a valuation prepared for fundraising or the sale of the company,
- an excessively high value could make things difficult in the future,
- there are laws as to what information should or shouldn’t be taken into account in preparing the valuation, and
- you should consider whether to agree the valuation with HMRC and register the valuation agreement.
Read on to learn more!
Why might a sale or fundraising valuation be different to an EMI valuation?
Suppose someone values a company with 1,000 shares at £1m. If they bought the whole company, they can exploit the full value in any way they wish. This justifies the full £1,000 per share. If they only bought 1 share, the only way of receiving value is by selling the share or passively receinving dividends – the owner of a small shareholding would lack legal authority to influence how the company is run.
Different considerations apply for a fundraising valuation. Here, investors are buying new shares which provides extra funding to the company for it to grow its business (compared to a company sale where the money goes to shareholders) and so the valuation is often based on the potential value of the business once it has grown, using the extra funding. This means that a fundraising valuation will often be significantly higher than the sale valuation of a small shareholding per share.
The rule of thumb is that small shareholding in private companies are worth, per share, a small fraction of the value of the value per share of a majority stake.
Why might an excessively high value make things difficult?
The valuation is used for two things:
- calculating the tax due when the option is exercised, and
- calculating how much of the limits on EMI options (of £250k per person and £3m per company) are used.
An excessively high value could discourage option holders from exercising options (so the potential for them to be motivated by dividends on exercised options is lost), and could use up the EMI limits too quickly, meaning the company is prevented from awarding EMI options in the future.
What laws are there on what information should be taken into account?
Put simply, the owner of a small shareholding would not have access to all information: only the information that is made public. Suppose draft financial statements indicate an enormous increase in profits, but these haven’t been published. Taking these financial statements into account would result in a hugely increased share pirce, but there is an argument that they would not have been available for a small shareholder, and so the value of a small holder of shares should not reflect this.
Why should you agree a valuation with HMRC and register it?
The directors of your company must, at a minimum, decide a reasonable value for the shares, which will be disclosed to HMRC when the EMI options are registered.
You have the choice as to whether to send the valuation to HMRC and seek agreement. Once you have agreed the valuation, you will be given a reference number which you would disclose to HMRC when the EMI options are registered.
You will benefit from this extra work when due diligence is done on the company (normally in the context of a fundraising or sale). If a lawyer or accountant sees the valuation has been agreed and registered with HMRC, they will not ask any further questions. If there has not been agreement, you may need to justify why the valuation was reasonable – an unnecessary disctraction at a time when distractions will be very unwelcome.