Note: Our good friends and partners at FounderCatalyst wrote this piece. You can find the original version of the post linked here.
SEIS and EIS are UK Government-supported tax efficient methods for angel investors to invest in early-stage businesses. In this blog, we describe why they are most likely a key aspect of your journey to take on equity funding.
SEIS stands for Seed Enterprise Investment Scheme and is aimed at very early-stage businesses. The tax breaks in SEIS are more generous to reflect that investors are investing early and therefore, in theory, their money is at more risk than a later-stage EIS investment. Businesses can receive a maximum of £120,000 through SEIS investments.
EIS stands for Enterprise Investment Scheme, is aimed at slightly later stage businesses and the tax breaks are slightly less generous...but still great! Under EIS, you can raise up to £5 million each year, and a maximum of £12 million in your business’ lifetime.
Why do Investors love these schemes?
The tax breaks for investors are amazing. As an example, if they invest £10,000 under SEIS in your company:
They get £50,000 back, offset against their personal tax bill.
They pay no capital gains tax on any increase in value.
There is additional downside protection, which varies depending on their tax position. But roughly, they get a further ~23% of their investment back if your company folds, and
It is likely to be exempt from inheritance tax, providing the shares have been held for at least 2 years and are held at the date of death.
SEIS investments are inevitably made in early-stage businesses (they must have been trading for less than 3 years), so the valuation should be low meaning that an investor should own a relatively healthy % of the company for their investment.
Benefits for Founders
The primary benefit for founders is that these schemes attract angel investors to part with their money to a much greater extent than they would otherwise. If you are raising in the UK from UK investors and you don't offer the benefits of SEIS/EIS then your investment opportunity is at a significant disadvantage - and will mean that many investors won't even look at your start-up.
A secondary benefit: the terms under which angels will invest under the SEIS/EIS schemes are very heavily regulated. Investors using SEIS can't ask for VC-type terms, such as liquidation preferences, anti-dilution and no-dilution...So your early-stage investment should be received with very 'founder-friendly' terms.
Challenges with the schemes
There is a lot of paperwork for founders to complete and manage, both pre-investment and post-investment.
There are LOTS of rules. It is very easy for companies that have taken (S)EIS investment to inadvertently breach the rules - in which case, the investor loses all of the benefits detailed above and you lose the ability to raise further money under (S)EIS.
Applying for SEIS / EIS Advanced Assurance
You'll need to get SEIS and/or EIS Advance Assurance in place to take on any investment under the SEIS or EIS scheme. This is confirmation from HMRC that, based on the information you have submitted, investments in your company are eligible for these schemes.
The good news is that FounderCatalyst includes a SEIS/EIS package for Advance Assurance, free for customers who have paid for the funding round service.
To find out more about this, create an Account or Login to get started by clicking here.
Please note that this blog is based on the position as of June 2023.
We look forward to building with you,
The foundercentre team
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