Whether they are angels or dragons, investors with cash to pump into start-up companies are a sought after commodity by entrepreneurs.
The aim for an entrepreneur is to sell some shares in the business in return for a cash investment.
However, sometimes the cash comes with strings attached, writes seis.co.uk, a web site specialising in news and advice for new businesses.
The website explains the principle is simple – investment or equity finance is like selling some of the family silver to move the business forward quicker.
“One of the best ways to do offer an equity stake to an investor is to wrap the deal in the government’s Seed Enterprise Investment Scheme (SEIS),” the site says.
“The process is tied up in some red-tape with HM Revenue and Customs, but the basics are the tax man approves the business as qualifying for SEIS, which is a green light for investors to claim some great tax breaks on the cash they input to buy shares.”
For and against SEIS
Looking for an equity investment rather than a loan comes with advantages for the start-up company and the investor, including
- New skills from a mentor/investor – often entrepreneurs come with a passion for their firm but are good with ideas but lack business skills like finance, administration and marketing
- Equity stakes are not loans, so the business no overheads against the cash input under SEIS
- The investor has no preferential terms and faces the same financial risks as other shareholders
- SEIS tax wrappers can cover crowdfunding from a pool of investors
The downside of equity funding can include:
- SEIS red tape eating up time for the business and restricting activities
- Entrepreneurs end up with less shares giving a lower return on their idea
- Investors will want to sit on the board and a veto over some management decisions to protect their stake
- Not all businesses qualify for SEIS
SEIS tax breaks
SEIS was thought up by Chancellor George Osborne, who announced the scheme in his Budget 2012.
Investors can input up to £100,000 into a start-up company in a single tax year and another up to £50,000 in the following years.
In return, they benefit from tax breaks like:
- A 50% reduction in income tax paid up to a maximum £50,000
- Capital gains tax exemptions on the disposal of assets to raise cash for SEIS investment
- Capital gains tax breaks on disposing of shares at the end of a SEIS
- Loss relief against other income should the business fail