One of the most common questions I’m asked by early-stage entrepreneurs is ‘how do I make my business more attractive to a seed or angel investor?’.
In this blog post, I’m going to focus on one particular step you can take – enrolling in the UK government’s Seed Enterprise Investment Scheme (SEIS). In my opinion it’s one of the most important things you can do, and in the next few minutes we’ll cover exactly why.
Let’s start with the basics – what is SEIS? In short, it’s a scheme through which an investor can buy shares (i.e. make an investment) in an enrolled company and in doing so can gain (quite substantial) tax relief.
So why is this so attractive to investors? Well there are a few main reasons:
- They can gain Income tax relief of 50% on their investment
- If they sell their shares and make a profit after three years, those profits are exempt from Capital Gains Tax
- If any SEIS shares are sold at a loss then an investor can offset the loss against Capital Gains Tax
- There is no Inheritance tax on SEIS shares held for at least two years
In short, there are immediate upsides (in the form of tax relief), mid-term upside if things go well, and longer-term risk mitigation (in the form of CGT offset) if they don’t. It shouldn’t take a genius to see that it makes investing a significantly more attractive prospect.
And ultimately that is why the scheme exists – to encourage the direct investment by angel investors into fledgling businesses which typically will be perceived as a higher risk investment.
In practical terms, the danger of NOT having your startups enrolled in the scheme is that an investor doesn’t even consider your deck – or at best, you’d need to be pitching something quite remarkable for them to overlook missing out on the above benefits.
To qualify to join the scheme, your company must be less than three years old, have fewer than 25 employees and have assets of less than £350,000. There are a few more hoops to jump through, but almost all tech-startups qualify. The lifetime maximum investment you can receive under SEIS £250,000.
And if you’re beyond SEIS, you may still be eligible for its sibling scheme – EIS. This is essentially the same, but offers investors a lower tax break (only 30%). You must have been trading for less than seven years and there is a much higher limit on the amount you can raise (up to £12m, capped at £5m/year).
SEIS and EIS are hard to overlook when you’re in the early days of fundraising – and whilst being enrolled won’t guarantee you an investment, it’ll make your offer look a lot more attractive to would-be investors.
