Whichever stage you are at in your startup journey, it's always wise to be preparing for investment; it is a great way to focus and plan for the future.

Whichever stage you are at in your startup journey, it's always wise to be preparing for investment. In terms of setting up your team, preparing your business processes for growth and adding as much value as you can before you seek finance, preparing your business for investment is a great way to focus and plan for the future.

The HMRC’s Enterprise Investment Scheme and Seed Enterprise Investment Scheme (EIS & SEIS) is one of those buzzwords in finance at the moment and many Workspace-based businesses have taken advantage of the process.
 
There's good reason for this: these schemes offer compelling incentives to would-be investors. 
 
The Enterprise Investment Scheme and Seed Enterprise Investment Scheme are government initiatives, administered by HMRC aimed at boosting UK business growth. They provide generous tax relief incentives to investors who purchase shares in small, promising, higher-risk, and early-stage companies.
 

 
THE SEED ENTERPRISE INVESTMENT SCHEME
 
This scheme helps new and early-stage startups raise finance of up to £150,000. There are a number of conditions (read a more detailed overview of the qualifying criteria on the HMRC website. The most relevant criteria are as follows;
 
The company:

  • Must be resident in the UK or at least have a permanent establishment in the UK.
  • Must not be listed on any recognised stock exchange, excluding the Alternative Investment Market. 
  • Must have no more than 24 employees .
  • Must have total assets equalling no more than 200,000.  This includes the assets of any subsidiaries, if it happens to be a parent company. 
  • Must not have been in receipt of investment from a Venture Capital Trust (other investment initiates administered by government).
  • Must not have received in excess of £150,000 from Government aid schemes in the past 3 years, since any government aid received within this time period is deducted from the potential investment ceiling.
  • Must have been trading for less than two years from the date on which the shares in question are issued. 

THE ENTERPRISE INVESTMENT SCHEME
 
This scheme helps small, high-risk companies raise finance of up to £5 million.  It is aimed at companies with a high-growth potential who, because of the risks involved in their trade, may struggle to secure the capital necessary to reach maturity. (Again, all the details of the qualifying criteria may be found on the HMRC website.)
 
The company:

  • Must be resident in the UK or at least have a permanent establishment in the UK.
  • Must not be listed on any recognised stock exchange, excluding the Alternative Investment Market. 
  • Must not have control over any other non-qualifying company.
  • Must have no more than 250 full-time employees.
  • Must not have assets totalling more than £15m at the time shares are issued.

 HOW TO SPEND IT
 
Both schemes have placed fairly tight restrictions on the manner in which any funds raised must be spent. Here is a summary of the key details.
 
Money raised under these schemes:

  • Must be employed within 3 years (2 years in the case of EIS) of the share issue on qualifying trade or for the purpose of preparing for such trade e.g. research and development. 
  • Cannot be used to buy shares or stock in another company.
  • May be used to invest in a qualifying subsidiary.
  • May not be used to pay dividends to shareholders. 
  • It is really important that you are confident in your ability to stay within these parameters, as spending the money in a way that isn't permitted under the scheme, will result in your investor losing their tax relief benefits.

 BENEFITS TO INVESTORS
 
Investors receive in excess of 50 per cent of their capital investment back in the form of tax breaks and refunds. Beyond this, things become ludicrously complicated. 
 
The nitty gritty is complicated (leave that particular trial to the accountants) but if your business qualifies for either scheme, investors will see you as a far more appealing investment prospect.  
 
WHERE TO START
 
If you are thinking about these investment schemes to raise capital, just make 100 per cent sure that you are eligible. Details of all the requirements can be found in the Issuing Company Manual created by HMRC.  
 
And the next step would be to seek legal advice.