Why investors care about dilution
Early-stage investors, particularly angel investors using the SEIS or EIS schemes, often worry about dilution. They’re taking on early risk and expect that risk to be rewarded fairly as the company grows.
Dilution happens when a company issues more shares in future funding rounds, reducing the percentage ownership of existing shareholders.
Common questions from investors
“What happens to my shareholding when you raise again?”
“Will future investors get preferential treatment that dilutes me unfairly?”
“Can you protect my percentage ownership?”
These are understandable concerns, especially from individuals investing their own capital.
What you can do to reassure investors
Offer pre-emption rights
Pre-emption rights give investors the right of first refusal on future share issues. If you're raising again, these rights ensure your current investors can buy new shares to maintain their ownership percentage. We include more information on pre-emption here
Important: These are perfectly compatible with SEIS/EIS and are considered standard in most early-stage shareholder agreements
Include investor consent rights
You can include provisions in your shareholders’ agreement that require investor consent for key decisions, such as:
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Issuing new shares
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Creating new share classes
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Changing the rights attached to shares
This gives early investors reassurance that future dilution can’t happen without their input. We include more information on investor consents here
Share a clear funding roadmap
Investors are often more comfortable when they understand how many funding rounds you expect, and at what milestones or valuation increases. Outline a rough path (with disclaimers, of course) showing:
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When you anticipate raising again
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What milestones will trigger the next round
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The expected impact on the cap table
This helps investors see dilution in context.
Use clear and transparent communication
SEIS/EIS investors are often non-institutional and appreciate clear updates. Regular reporting (e.g. quarterly updates), cap table snapshots, and openness about fundraising plans go a long way in building trust and reducing concerns.
What you cannot do under SEIS/EIS
This part is critical. The SEIS and EIS schemes are very strict, and offering the wrong terms can invalidate your investors’ tax relief. Here’s what you must avoid:
No anti-dilution protections
You cannot offer:
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Non-diluting shares
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Full-ratchet or weighted-average anti-dilution clauses
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Guarantees of future ownership percentages
These are not allowed under SEIS/EIS rules and would breach HMRC conditions.
No preference shares or special treatment
All SEIS/EIS shares must be ordinary shares with no preferential rights. That means:
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No liquidation preferences (except for 1x non-participating liquidation preference)
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No fixed return
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No redemption rights
Any deviation could lead to HMRC withdrawing relief - putting both the company and the investor at risk.
