I attend quite a few tech startup events and one topic which comes up without fail every time is that of seed finance; that is, raising capital in the very early stages of a business in order to fund development costs. Despite my own feelings towards this (do you REALLY want to give away a chunk of your company before you’ve even started building the product?), it’s important for founders to be aware of just how important the Seed Enterprise Investment Scheme (or ‘SEIS’) is when pitching for investment.

Since April 2012, individual investors (e.g. business angels) who meet certain criteria have been able to take advantage of SEIS, which provides relief from income and capital gains tax - effectively meaning that their risk of losing money by investing in your startup is drastically reduced. In practice this means that a startup which is ready for SEIS investment is more likely to attract an investor than a startup which is not. HMRC’s website provides some helpful examples in monetary terms.

Startups collaboration meeting business

Your startup needs to meet a few requirements in order to be eligible for SEIS, but note that this is a simplified list which covers the basics only (and ignores the rules that apply if your company is part of a group or has subsidiaries - which is extremely unlikely for the majority of tech startups):

Upon incorporation:

1. Your company must be independent, right from incorporation until 3 years after the SEIS shares are issued. This means you can’t give away more than 49% of the equity to any one person (and if you did, they would not qualify for SEIS anyway - see point 9 in the next paragraph).
2. Your company cannot be a member of a partnership. This means your startup can’t be part of a contractual joint venture with another person or company. This is unlikely for a startup.

At the time the investor’s (or investors’) shares are issued

1. Your company must have less than 25 employees in total.
2. Your company must have less than £200,000 in gross assets.
3. Your company must be unquoted. This means it can’t be listed on a recognised stock exchange. This is very unlikely for a tech startup.
4. Your company must be carrying on a ‘new qualifying trade’. This includes most types of business, so long as it does not include a large number of excluded activities. Excluded activities are listed here (note the reference to financial, legal and accountancy services - this may affect you if you are a fintech startup). If your company has already started trading, this cannot have gone on for longer than 2 years. If it hasn’t started trading yet, that’s fine - but the money you raise must be used towards R&D costs for the new trade.
5. Your company cannot have had any previous investment from venture capitalists.
6. Your company cannot have previously taken advantage of EIS (a different, less favourable tax relief).
7. Your company can raise a maximum of £150,000 under the SEIS. If you want to raise any more than this, investors beyond those putting in the first £150,000 cannot take advantage of SEIS in your company. However, they may still be able to take advantage of EIS.
8. Your company must meet the financial health requirements. Most tech startups will.
9. You cannot issue more than 30% of your company’s shares to any individual investor, and an individual investor can’t put in more than £100,000.
10. If your investor is a direct relative, and you already have a business relationship with them, they may exceed the 30% limit. You should check whether this is the case in advance.

Following the investment round:

1. The company must continue to be UK resident or have a permanent establishment in the UK for at least 3 years following the issue of the SEIS shares. A permanent establishment is pretty much what it sounds like, i.e. a fixed place of business, but having an agent in the UK may also count.
2. The company must exist solely for the purpose of carrying out the qualifying trade. This is usually the case for a tech startup.

Restrictions on the use of the funds raised:

1. The company must spend all the money raised under SEIS within 3 years of issuing the shares to the investor(s), otherwise the investor(s) will lose their tax relief.
2. The money can only be spent on ‘qualifying business activities’. These include carrying on the ‘new qualifying trade’ mentioned above, preparing to carry it on, or carrying out R&D in connection with it.

Most investors will want assurance that they can take advantage of SEIS if they invest in your company, and if you’ve taken professional advice this will be a big draw. It is even possible to obtain advance clearance from the Small Company Enterprise Centre which is a branch of the HMRC and this is highly recommended to give potential investors peace of mind. When applying for advance clearance, you will need to have an idea of how much money you are looking to raise and how it will be used.

The biggest area of concern for tech startups here is whether your idea will be a ‘new qualifying trade’ - if you are looking to provide financial, legal or accountancy services, you may be excluded. Most of the other restrictions are unlikely to apply if you and a couple of fellow founders are simply incorporating a new company with a view to raising investment down the line.

The bottom line is that if you want to attract investment into your tech startup, you should be able to provide investors with proof that they will qualify for SEIS. Anything you can do to reduce their risk will be in your favour.