Four-year vesting with a one-year cliff on EMI options, a SuLe guide
By SuLe · Updated 5 November 2026
Reviewed by Patricia Wing, corporate lawyer and founder of SuLe
On a four-year schedule with a one-year cliff, nothing vests before month 12, a quarter vests at month 12, then the rest vests monthly to month 48. In the UK the grant is usually an Enterprise Management Incentive (EMI) option, so the schedule runs inside the rules of HM Revenue & Customs (HMRC) on who can grant, who can hold, when HMRC must be told and how long the holder has to exercise. SuLe is Hybrid Legal, combining smart technology, trained AI and senior lawyers. We help founders set this up, and our Pro plan includes option pools, EMI grants and vesting schedules on the cap table that investors price a round from.
The schedule month by month
The cliff sits inside the four years. It means a hire who leaves in the first year does not walk away with a lasting stake in the company. Nothing vests in months 1 to 11. At month 12 the cliff is reached and 25% of the grant vests at once, and after that one forty-eighth of the original grant vests each month until the schedule ends at month 48.
We use a grant of 4,800 options here, which gives 100 options a month after the cliff.
| Month | Options vested in total |
|---|---|
| 11 | 0 |
| 12 (cliff) | 1,200 |
| 19 | 1,900 |
| 30 | 3,000 |
| 48 | 4,800 |
Leaving after the cliff
Someone who leaves from month 13 onwards has more than a quarter vested. At month 19 the holder has 1,900 vested options, not the 1,200 from the cliff, because monthly vesting carries on after month 12. The 25% figure only holds for someone who leaves before the first monthly vest at month 13.
Unvested options normally lapse on leaving. What happens to the vested ones depends on the leaver terms in the scheme rules.
Who can grant EMI
Only a company inside HMRC's limits can grant EMI options. The company conditions are set out in GOV.UK's employer guidance, and they changed on 6 April 2026.
The company limits
From 6 April 2026 most companies can grant EMI options if they have gross assets of £120 million or less, fewer than 500 full-time employees and unexercised EMI options worth no more than £6 million, according to HMRC's EMI notification guidance. On or before 5 April 2026 the limits were £30 million, 250 employees and £3 million. The higher limits, and the 15-year exercise period covered below, do not apply to a company with its registered office in Northern Ireland that trades in goods or electricity. A company above any of these limits cannot grant EMI options.
The trade test
The company must also carry on a qualifying trade. The employer guidance lists the excluded activities, which include banking, farming, property development, the provision of legal services and ship building. We suggest checking that list before the first grant.
Who can hold EMI
An employee can hold EMI options worth up to £250,000 in a 3-year period, as long as they work enough for the company. GOV.UK's EMI page sets that at 25 hours a week or 75% of their total working time.
A vesting schedule does not make an option qualify on its own. The employee has to meet these conditions at grant. If they later stop meeting the employment requirement, that is a disqualifying event.
Four clocks, not one
An EMI option runs on four separate clocks. We keep them apart because each one ends on a different date.
| Clock | What it controls | Timing |
|---|---|---|
| Vesting | When options are earned | Months 1 to 48 on this schedule |
| Exercise terms | When a vested option can be used | Set by the option agreement |
| Exercise period | How long the tax advantages last | 10 or 15 years from grant, as the option agreement says |
| Disqualifying-event window | Time to exercise after a trigger | 90 days, due to rise to 180 days for events from 6 April 2027 |
UK startup options are often exit-only, so a vested option may not be exercisable until a sale.
The exercise period
The tax advantage holds if the option is exercised within 10 or 15 years of grant. GOV.UK's EMI page says no Income Tax or National Insurance is due if the holder pays at least the market value at grant and exercises within that period.
Telling HMRC
The company registers the EMI scheme with HMRC first, then tells HMRC about each grant. If the company misses the deadlines, it risks losing the tax benefits for itself and its employees.
Notify each grant on time
For grants made on or after 6 April 2024, the company notifies HMRC by 6 July following the end of the tax year of grant. The annual return for the scheme is also due by 6 July.
Reporting from April 2027
From 6 April 2027 the separate grant notification is due to end, and grants are due to be reported on the EMI annual return instead. The change was announced at Budget 2025, and HMRC set it out in its October 2026 employment related securities bulletin 69. It applies to options granted on or after 6 April 2027. Options granted before that date still need the separate grant notification as well as the annual return.
Leaving the company
Leaving is both a practical event and a tax event for an EMI holder. The scheme rules and the tax rules decide what happens.
Good and bad leavers
Good leaver and bad leaver are labels the scheme rules define. Good leavers, for example after redundancy or ill health, usually keep some or all of their vested options. Bad leavers, for example after dismissal for misconduct or a breach, often forfeit even vested options. We recommend writing these terms into the scheme rules before the first grant, because agreeing them once someone has already handed in their notice is harder for the company and the employee alike.
The 90-day window
Leaving employment is a disqualifying event, and exercising within 90 days of it keeps the EMI tax advantages. After 90 days, Income Tax can apply to the growth in value between the event and exercise.
The window is a tax rule. It does not give the holder a right to exercise if the option agreement does not allow it. Some leavers keep exit-only options and exercise them on a sale. If the sale comes more than 90 days after leaving (180 days for someone who leaves on or after 6 April 2027), the leaver pays Income Tax on the growth in value after they left. National Insurance is also due where the shares are readily convertible assets.
180 days from April 2027
From 6 April 2027 the window is due to rise from 90 days to 180 days, for disqualifying events on or after that date. Unlike the reporting change, this one was announced at Budget 2026 and set out in an October 2026 policy paper on employee share schemes. HMRC's bulletin 69 confirms that the longer window will also apply to option agreements already in place before 6 April 2027.
Tax when shares are sold
Selling EMI shares can bring Capital Gains Tax. Business Asset Disposal Relief can lower the rate, and for EMI shares the relief needs the option to have been granted at least 2 years before the sale. Qualifying gains on disposals from 6 April 2026 are taxed at 18%, up to a lifetime limit of £1 million. That limit is due to fall to £500,000 for qualifying disposals from 6 April 2027, and the relief has other conditions as well.
Options on a sale
On a sale, the scheme rules decide what happens to the options. They often become exercisable on a change of control, usually through a same-day exercise and sale, where the holder exercises and sells the shares to the buyer in one step. Whether unvested options vest early on a sale, known as acceleration, depends on the option documents.
Acceleration
Single-trigger acceleration vests unvested options on the sale itself. Double-trigger acceleration vests them only if the holder is also let go after the sale. It keeps the team incentivised to stay through the transition.
Replacement options
A takeover can be a disqualifying event. The employer guidance says a company reorganisation can be one unless qualifying replacement options are granted. We suggest raising replacement options early in any sale.
The pool and your round
Investors price a round from the fully diluted cap table, and the option pool is part of that picture. Fully diluted means counting all shares as if every option, warrant and convertible had been exercised or converted, and a pool is usually quoted on that basis. That is why we treat the pool and its vesting as part of getting round-ready.
Before and after you grant
Work through these five steps.
- Check the company limits that apply to you and the trade test.
- Write the leaver terms into the scheme rules.
- Register the scheme with HMRC.
- Set the exercise price at the market value at grant, or know the Income Tax cost of a lower price.
- Notify each grant by 6 July after the end of the tax year of grant, or on the annual return for grants from 6 April 2027.
Download our Share Option Plan checklist to set up your scheme before the first grant.
Frequently asked questions
What happens if I leave before the cliff?
On our schedule nothing has vested before month 12, so a first-year leaver goes without any vested options. Any unvested options usually lapse once the holder has gone.
How many options vest at month 12?
The cliff releases a quarter of the grant in one go, which is 1,200 options in our 4,800-option example. After that a further 100 options vest every month until all 4,800 have vested at month 48.
Do I pay tax when I exercise EMI options?
No Income Tax or National Insurance is due where the price paid is at least the market value at grant and exercise happens within the 10 or 15-year exercise period. A price below that market value carries an Income Tax cost, and exercising more than 90 days after a disqualifying event, such as leaving, can bring Income Tax on the growth in value since that event.
How long do I have to exercise after leaving?
A leaver keeps the EMI tax advantages by exercising within 90 days of leaving. For anyone who leaves on or after 6 April 2027 the window is due to be 180 days, and it only helps where the option agreement allows exercise.
What happens to unvested options when the company is sold?
That is for the option documents to say. With single-trigger acceleration the sale alone makes them vest, while double-trigger acceleration also needs the holder to be let go after the sale.
This article is general information for founders and is not legal, tax or financial advice. Please contact us if you have questions.
EMI tax treatment depends on the company and the employee meeting HMRC's conditions.
References
- GOV.UK. "Tax and Employee Share Schemes: Enterprise Management Incentives (EMI)." https://www.gov.uk/tax-employee-share-schemes/enterprise-management-incentives-emis
- GOV.UK. "How employment related securities work if you're an employer." Updated 28 October 2026. https://www.gov.uk/guidance/how-employment-related-securities-work-if-youre-an-employer
- GOV.UK. "Submit an Enterprise Management Incentives (EMI) notification." Updated 6 April 2026. https://www.gov.uk/guidance/submit-an-enterprise-management-incentives-emi-notification
- GOV.UK. "Employment related securities bulletin 69 (October 2026)." Published 29 October 2026. https://www.gov.uk/guidance/employment-related-securities-bulletin-69-october-2026
- GOV.UK. "Changes to Employee Share Schemes." Published 28 October 2026. https://www.gov.uk/government/publications/changes-to-employee-share-schemes-including-company-share-option-plan-and-enterprise-management-incentives/changes-to-employee-share-schemes
- GOV.UK. "ETASSUM57090, Disqualifying events relating to an employee." https://www.gov.uk/hmrc-internal-manuals/employee-tax-advantaged-share-scheme-user-manual/etassum57090
- GOV.UK. "ETASSUM57060, Charge on exercise of an option following a disqualifying event." https://www.gov.uk/hmrc-internal-manuals/employee-tax-advantaged-share-scheme-user-manual/etassum57060
- GOV.UK. "Business Asset Disposal Relief." https://www.gov.uk/business-asset-disposal-relief
- SuLe. "Get our Share Option Plan Checklist." https://sule.io/share-option-plan-checklist/
