The UK tech industry is Europe’s number one Tech Nation with investment in 2019 soaring 44% to £10.1 billion. Whilst investment is readily available, getting hold of it is another matter. Around 12,000 tech companies started business in 2018, so competition for investment is intense.
How does a business maximise their chance of a successful fundraise?
One of the main reasons that investment for start-ups is more readily available in the UK than other European countries is because the government encourages investors with generous tax incentives such as EIS (Enterprise Investment Scheme) and its younger sibling SEIS (Seed Enterprise Investment Scheme). They understand that young and innovative companies need early-stage investment to help them grow.
These tax incentives are designed to encourage angel investors to invest in innovation by recognising the speculative nature of seed and early-stage investments and offering significant potential tax benefits to the investor.
So, if you want to make your company more attractive to investors, and maximise the chance of a successful fundraise, the business needs to be EIS eligible.
How much can a business raise in EIS funding?
A maximum of £12 million per company can be raised in EIS funding (but no more than £5 million in any 12-month period).
An investor, however, can only invest a maximum of £1 million in qualifying companies in each tax year.
For very early-stage companies seeking to raise up to £150,000, SEIS is a better option.
Related Article | How to use the Seed Enterprise Investment Scheme (SEIS)
To become an EIS qualifying company the business would need to satisfy many requirements
For an investor to be able to claim EIS tax reliefs, the company they are investing in must meet the EIS eligibility requirements and maintain their EIS eligibility status for the three year period following investment.
When the shares are issued, the company must:
- Have a permanent UK establishment
- Not have gross assets worth more than £15 million before any shares are issued, and not more than £16 million immediately afterwards.
- Have fewer than 250 ‘full-time equivalent’ employees.
- Not be trading on a recognised stock exchange, and have no arrangements in place to become quoted on a recognised stock exchange.
At the time of the share issue AND for three years after the share issue, the company must:
- Be independent; not under the control of another company (or not have more than 50% of shares owned by another company).
- Conduct a qualifying trade.
Additionally, all money raised from the issue of EIS shares must be used to grow and develop the business, and must not be used to make acquisitions of either another company’s shares, trade or certain types of trading asset.
Most investors will want to see ‘advance assurance’ from HMRC that a planned investment meets the conditions of EIS
You can ask HMRC if they agree that an investment would meet the conditions of EIS before you seek investment. This is called advance assurance. It can be used to assure potential investors that their proposed investment would qualify for the scheme.
It isn’t a quick process, and it’s easier with experienced support. Isosceles has successfully helped many business raise EIS compliant funding.
The advance assurance application will need to include:
- How much you hope to raise.
- The business plan and financial forecasts.
- A copy of the latest accounts if available.
- Details of all trading and activities to be carried out, and how much you expect to spend on each activity.
- A list of the amounts, dates and venture capital schemes under which you’ve previously received any investments.
- An up to date copy of the Memorandum and Articles of Association and details of any changes you expect to make.
- A copy of the Register of Members from the date you apply for advance assurance.
- The latest draft of any documents you use to explain your proposal to potential investors.
- Details of any other agreements between the company and the shareholders or VCT.
- A signed letter from one of your directors or trustees if you’re allowing an agent to act on your behalf.
- A completed checklist for EIS.
- Any other documents to show you meet the qualifying conditions for the scheme.
How does a company find potential investors?
Usually, investors wishing to take advantage of EIS investment opportunities are individual investors. These may be people already known to you or, more commonly, you can find them through investor groups located around the country. Some common sources of investors are:
- Business Angel groups
- Crowdfunding, for example, Seedrs, Syndicate Room, Crowdcube, etc.
- Friends and family
Related Article | How to manage your investor
How can we help?
Isosceles has a wealth of experience in raising money for our clients through EIS. If you think we can help, please call Andrew Taylor on 01784 770880.