We get a lot of questions about raising money through the Enterprise Investment Scheme (EIS) so we’ve put together this practical cheat sheet to help you navigate it. This guide isn’t exhaustive, but it covers the essentials founders need to know; for more details, there are plenty of other useful resources linked along the way.
What are SEIS and EIS?
TL;DR: Individual investors in the UK receive tax breaks which gives them an additional incentive to invest in startups.
The Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS) are UK government initiatives to encourage investment in early-stage companies.
The scheme has been around for 30 years and used to cover all manner of things, including things like pubs and dentists, but the scope has been narrowed to high-growth startups. Since then, nearly half of UK unicorns founded between 2011 and 2023 received EIS investment.
With the sunset clause recently extended to 2035, it’s very much here to stay and can be a great way to raise (at least part of) your funding rounds alongside other institutional investors.
EIS funds will have a large number of downstream investors who are also bought into your success as a business. Some funds, like Love Ventures, are focussed on unlocking doors to this network of HNW investors – who range from FTSE100 CEOs to exited entrepreneurs – and can be a key source of their value-add.
Read more about the scheme here: What is the Enterprise Investment Scheme (EIS)? | British Business Bank
Part 1: Being S/EIS Eligible
TL;DR: Most UK-based early-stage tech startups with a vanilla company structure qualify unless they’re involved in excluded activities like lending. Non-UK startups with a permanent establishment in the UK should also quality.
The key difference between SEIS and EIS is the size of the business and the amount you can raise.
– SEIS companies can be up to 3 years old, under 25 employees and under £350k in gross assets. You’re limited to raise £250k.
– EIS companies can be up to 7 years old, under 250 employees, and under £15m in gross assets. You can raise up to £12m investment (or £20m if you’re a knowledge-intensive company).*This is capped at £5m per year.
Be sure to check if your company falls into any of the excluded activities listed here: HMRC: Excluded Activities
Common challenges
Non-UK startups: While non-UK companies can qualify, they must establish a ‘permanent establishment’ in the UK: this is generally in the form of an office (or other fixed place of business), or an agent (i.e. someone who can enter into contracts on behalf of your contract). For instance, a French SaaS company would need to register as an overseas entity in the UK to get a UTR (Unique Taxpayers Reference Number), as well as having a permanent establishment as above.
Lending startups: These are typically excluded because lending is considered a non-qualifying trade. For example, a P2P lending platform may not qualify for EIS (gov.uk). That said, in certain circumstances companies can split this out from their core business operations.
Advance Assurance
This gives investors confidence their investment will qualify for EIS. Whilst not mandatory, it’s highly recommended and generally does not require a huge amount of work. HMRC approval timelines can be a bit of a mystery, but typically startups hear back from between 2 weeks and a couple of months.
There is more detail in the SeedLegals S/EIS Ebook here. Or for more detail, check out GOV.UK: Use a venture capital scheme to raise money for your company.
Tools like SeedLegals can simplify the process, but more complex cases may require expert advisors like Philip Hare & Associates.
Part 2: Structuring Your Round to be EIS Eligible
TL;DR: Even if your company is eligible, your funding round structure must also comply with S/EIS rules. In short, priced rounds work well for EIS though you can also use ASAs or SeedFasts, but not SAFEs or CLNs.
– Funds must be used to purchase new shares, not existing ones.
– Shares issued: Ordinary, non-redeemable shares (sometimes Seed Preference shares with restrictions). Shares must not have preferential rights to assets on winding up, and any preference on income must be limited (HMRC Guidance).
– Convertible Loan Notes (CLNs) or YC Simple Agreements for Future Equity (SAFEs): As well as being under Delaware, not UK, law, these instruments lack a longstop date and contain provisions for return of capital in a dissolution event that incompatible with EIS.
– Alternatively: Use Advanced Subscription Agreements (ASAs), or a SeedFast, which comply with EIS rules if structured correctly. Ensure the ASA includes a longstop date of six months and aligns with EIS-compliant share issuance. The broad principles are the same but you can read more about the key differences between a SAFE and ASA here: Advance Subscription Agreement (ASA): Flexible Funding for Startups
– Or do a priced round (i.e. cash now, shares now), which is generally preferable.
Part 3: Post-Investment Process
TL;DR: Once your funding round is complete, you need to engage with HMRC to issue EIS certificates for your investors.
Here’s how:
1. Update your share registry and send your share certificates to your downstream investors
2. Complete your Compliance Statement (through your S/EIS1 Form) and submit this to HMRC
3. HMRC Review: HMRC will review your submission and, if approved, issue you an S/EIS2 form
4. S/EIS 3: check with your investors whether they want you to generate the EIS3 certificates or if the fund manager will manage this process.
Tips:
– Allocate time for the HMRC process, which can take several weeks.
– Maintain clear records of how funds are used to ensure compliance.
– Engage with specialist tax advisors if you encounter complexities during this stage.
What Next?
Are you an EIS eligible tech startup raising a pre-Seed or Seed round? Pitch us here
Still not sure if you qualify? Check out the links in this cheat sheet and if you’re still unsure, speak to a tax specialist
Disclaimer: This guide is for informational purposes only and is not a substitute for professional tax or legal advice. Always consult an expert for your specific situation.
