When an entrepreneur is starting-up a new business, whether it is with a dynamic and innovative new idea, or with a fresh take on an old way of thinking about things, one of the hardest challengers facing a start-up can be how to fund it.
In general terms, where there is to be investment in a business there are two types of route to securing this:
This blog will be addressing the first route for investments, being in return for shares and the various schemes that can be available to start-ups, companies looking for investment and investors.
In this regard there are two schemes that are prominently available to start-ups or businesses looking for investment after the start up phase. These are called the Seed Enterprise Investment Scheme (“SEIS”) and Enterprise Investment Scheme (“EIS”). Outside of these two schemes, there are a few other ways for private investment in return for shares situation to be structured.
SEIS is a scheme which provides valuable and attractive incentives to investors who are looking to invest into start-up businesses. The EIS is a very similar scheme that has some nuanced differences due to being available to non-start-up businesses. We break down the requirements for each below:
| SEIS | EIS | BOTH |
| Less than three years of trading | Most commonly capped at 7 years trading | Established in the UK |
| Less than 25 employees | Less than 250 employees | Is not controlled by another company |
| Less than £350,000 in gross assets | Maximum gross assets of £15,000,000 | Part of a Qualifying Trade |
| Total of £200,000 from one investor | Total of £1,000,000 from one investor (per year) | Investors must be locked in for set period |
| Maximum of £350,000 of total investment | Maximum total investment of £12,000,000 (or £5,000,000 per year) | Is a private limited company |
| Potential tax break of 50% for investors | Potential tax advantages of 30% for investors | |
| Investors may be private individuals only | Investors can be individuals or corporate entities | |
| Investment monies must be spent within 3 years | Investment monies must be spent within 2 years | |
| Cannot have received EIS funding previously | Can have received SEIS funding before |
In respect of taking advantage of these, it will depend on your business, your needs and the investors you are looking to bring on board. Where you are a new business you are able to rely upon the SEIS route, whereas if you have received EIS investments in the past you will no longer be able to obtain SEIS approval.
As these are each a government scheme, they will need to be approved by HMRC as being suitable for either scheme, following which the investors will be able to benefit from the incentives built into the scheme.
What about the legal requirements for investment?
Alongside a business seeking approval of either of the two schemes, or where they are obtaining investment in return for shares in an ongoing business, there are some crucial elements that will need to be covered and put into place from a legal perspective.
There are two key documents needed:
An investment agreement will be an agreement handling the formalities and requirements that relate directly to the terms of the investment. This will likely involve the amount of money being invested, what is being given in return for the investment and any other key terms applicable to the investment. An example of some matters that would need to be addressed will be the types of shares being issued as part of the investment – what rights do they have – and the terms surrounding these shares, such as the period of time whereby the investor needs to be locked in.
On top of an agreement which records the investment and gives both the company and the investor some satisfaction and record of those terms will be a shareholders agreement. A shareholders agreement is a private agreement between the members of a company that governs that relationship, seeks to plan for the future as well as set out the expectations for the parties.
A Shareholders Agreement is vitally important for a business where there are investors involved, or any number of shareholders, as it handles what happens in certain situations, provides guidance and legal precedent for handling matters as well as seeking to avoid issues in the future.
We have previously written about an infamous situations where there were significant issues in a large multinational without a shareholders agreement (see the Oatker Feud here), but this is especially the case where there are investors included who may not have an everyday involvement with the business. Some of the key elements that having a shareholders agreement can pre-emptively solve includes: what happens when a shareholder dies, how a business handles a deadlock situation, who has control to make decisions in respect of the business direction and how is the sale of the business, or individual’s shares, handled.
If you are looking to go through with seeking external investment and are looking for advice in respect of how best to structure this, or to seek assistance with the legal documents that give effect to your investment and the relationship that follows once you have received investment, please get in touch and we would be happy to assist with this.
As an initial step we provide a free, obligation free initial consultation to discuss you, your business and your needs. If you are interested in this get in touch with us by telephone, on 01273 447 065, or by email to [email protected], or throughout contact form.
Can’t thank Benjamin Rose and Acumen enough for their faultless support during our SEED funding round, assisting with producing all legal documentation required as part of the process. Excellent from start to finish, attentive and would highly recommend! Thank you!
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