Most founders think of EIS and SEIS as paperwork for investors to sort out but it’s actually the one thing that decides whether an angel even looks at your pitch in detail. Whether your company qualifies is substantially in your control, from decisions you're making from the off.
Here's why it matters so much to the investor sitting across from you. SEIS gives an individual investor income tax relief on up to 50% of what they put in; EIS gives up to 30%. Both offer loss relief if the company doesn't work out, and both exempt investment gains from Capital Gains Tax if the shares are held long enough. For an angel weighing the very real risk of an early-stage investment, that relief materially changes the calculation. Take it away, and the same company, at the same valuation, becomes a much harder decision.
EIS/SEIS qualification is part of what you're selling
EIS/SEIS qualification is in your hands in two respects: eligibility and assurance.
Eligibility
EIS/SEIS eligibility is not universal: HMRC only allows it on certain investments. Eligibility rules include:
- what kind of trade you're carrying out (some sectors are excluded entirely — property, banking, and a handful of others don't qualify);
- how big your company already is (gross assets and employee count both have ceilings, tighter for SEIS than EIS);
- how long you've been trading;
- what you actually do with the money once you've raised it.
You need to get advice on these before you're mid-raise, not after a term sheet is on the table.
Advance Assurance
This is HMRC's preliminary view that your company is likely to qualify, obtained before you raise. It isn't mandatory, and it isn't a guarantee, but experienced angels will ask for it, and not having it is a flag, and often a dealbreaker. If you haven't applied for it, expect that question in your first serious conversation with any angel group. Some angel groups will not pass you for pitching without it.
The two mistakes that catch founders out early
Mistakes can be made often before you've even started fundraising. Structuring the company or its share classes in a way that inadvertently breaches the rules. This can include the wrong share rights, side arrangements with early investors, and connected-party issues.
Leaving Advance Assurance until it's too late to fix a problem it surfaces. That will often stall a deal and momentum on any deal is vital: stalled deals often fail to come to fruition.
Both are avoidable with the right advice and action at the right time, which is early, very early in your company’s life.
Often there is no substitute for professional advice. EIS/SEIS rules are detailed, they change, and getting the interpretation wrong can be expensive for both you and your investors. Get a specialist adviser involved before you raise, not after. But understanding the shape of the rules now means you'll have a real conversation with your accountant, instead of finding out what you don't know in front of an investor.
For the latest and definitive information on EIS/SEIS visit the HMRC website
David Jackson, Founder & CEO Certitia