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Is is possible to do your own EMI valuation

Is is possible to do your own EMI valuation and VAL231 or is it safer to have a legal firm complete?

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Is is possible to do your own EMI valuation and VAL231 or is it safer to have a legal firm complete? The company has been paying a firm but finding it costly as it issues new options frequently. Thanks, Margaret

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By Ruddles
11th Sep 2018 09:41

First of all, there is no need to have a valuation agreed in the first place (although it is usually highly recommended).

Secondly, then, there is no need to pay someone else to carry out the valuation - how comfortable are you with your own ability to value the company shares? It goes without saying that HMRC are probably less likely to dispute a valuation submitted by someone with the appropriate expertise - which does beg the question: few legal firms, except for the larger ones with their own corporate finance departments, that I know of have such expertise.

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By [email protected]
11th Sep 2018 09:59

Thanks, I did a number of discounted cash flows in the past, but never worked on bringing them back to an individual share price which I'm assuming is DCF / total shares & options. I'm sure I can google and work it out, but personally, I might prefer to pay a firm and avoid questions. Any tips on competitively priced firms?

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Replying to [email protected]:
By Ruddles
11th Sep 2018 10:11

mcarey.ecs-AT-gmail.com wrote:
Any tips on competitively priced firms?

Since I have no idea where you are, no (other than my own of course)
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By jon_griffey
11th Sep 2018 15:34

Obviously it depends on how complex the matter is but in my experience, HMRC seem to be fairly non-confrontational about the valuations on VAL231's and if a reasonable valuation is proposed they seem to readily agree. Invariably they involve small minority stakes in SME's and with a high discount, values are low. A client of mine got one done by a magic circle legal firm recently that charged them 10x what I would have charged.

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By [email protected]
12th Sep 2018 07:43

Thanks Jon. I got in touch with a company called Vestd yesterday and they concur on doing your own valuation. I found an article and from the guidance for start-ups could do it myself. I'm going to push the company to use Vestd (150 p.mth) rather than the Law firm. Vestd manages the complete emd to end process. We could have had 3 - 4 years with Vestd for set up and annual fees with the Law firm! I do a variety of operational stuff as well so would rather not spread myself thinly on EMI compliance.

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By [email protected]
12th Sep 2018 07:43

Thanks Jon. I got in touch with a company called Vestd yesterday and they concur on doing your own valuation. I found an article and from the guidance for start-ups could do it myself. I'm going to push the company to use Vestd (150 p.mth) rather than the Law firm. Vestd manages the complete emd to end process. We could have had 3 - 4 years with Vestd for set up and annual fees with the Law firm! I do a variety of operational stuff as well so would rather not spread myself thinly on EMI compliance.

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By Chris Lake
06th Mar 2019 15:56

Just wanted to say thanks for choosing Vestd. How are you finding the platform and service?

We recently published some guidance on the HMRC valuation process for EMI option shares, along with the various links you need to download and submit the VAL231 form: https://vestd.com/emi-share-options-scheme/company-valuation

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By jerryd46
12th Sep 2018 13:52

A few comments:
1. The valuation of a company for EMI purposes tends to be quite different from valuing a company for an investment or commercial sale, and agreeing the value upfront with HMRC is an important step in the process, as it has a huge impact on the employee’s tax position. For an EMI scheme, the lower the agreed share price the more beneficial it is for the employee - first, the cost for them to buy the shares is lower, and second, they don’t pay so much tax.

So in valuing the company we would avoid ‘over-egging’ the value and instead emphasise the risks and downsides that might exist. You would then request a discount on the 100% value for the following reasons:

1. an option holder receives only a small percentage of the shares and therefore they have very little ‘power’ compared with holding 100%, and this justifies a ‘minority shareholding discount’

2. there will typically be restrictions on the option shares e.g. they may lapse if the employee leaves the company, or they might be non-voting shares

Usually we obtain a deep discount on the full value per share. That value is confirmed as agreed by HMRC and will be valid until a sale of the company or for a maximum of 10 years. This means you can set the option exercise price at that value and there will be no income tax liability for the option holders when they exercise the options and buy the shares (alternatively you could set the price lower and they would just pay income tax on the discount as a benefit in kind). When they sell the shares any gain over the price paid will be charged capital gains tax at a rate of only 10%.

Generally, as a matter of policy HMRC is quite supportive of EMI schemes, and their valuation division understands that in an ‘entrepreneurial' company the employees – who basically risk their livelihoods - have typically a lot more to lose than external investors, particularly when the business is still facing risks such as being loss making, cash constraints and strong competition. HMRC appreciates that most of an investment valuation in such businesses is based on ‘hope value’ rather than definite numbers. We have several times agreed EMI valuations much lower than the investment valuation.

2. You would not normally need to go to the extent of using DCF.

3. Vested is certainly cheap and cheerful but you get what you pay for and EMI can be a complex matter and it's easy to fall into traps. They do not include any valuation work.

Jerry Davison
The Mill Consultancy

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