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 £150,000 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.
The government has a good summary of SEIS and EIS on their website which is worth reading.
The tax breaks for investors are amazing. As an example, if they invest £20,000 under SEIS in your company:
SEIS investments are inevitably made in very early stage businesses (they can be at most 2 years old, but in reality are usually in their first year), so the valuation should be low meaning that an investor should own a relatively healthy % of the company for their investment.
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 is 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.
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.
To take on any investment under the SEIS or EIS scheme, you'll need to get SEIS and/or EIS Advance Assurance in place. This is confirmation from HMRC that, based upon information that you have submitted, investments in your company are eligible for these schemes.
The good news is that at FounderCatalyst we include our SEIS/EIS package for Advance Assurance, free for customers that have paid for the funding round service. Create an Account or Login to get started by clicking here.
Please note that this blog is based on the position as of October 2020.
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