Why Startups Should Consider the Seed Enterprise Investment Scheme

The primary aim behind the Seed Enterprise Investment Scheme (SEIS) is to assist small, early stage companies in raising equity by providing tax incentives to individual investors who purchase shares in those companies. The SEIS has applied to shares held after 6th of April 2012 and was designed to complement the Enterprise Investment Scheme (EIS).

The main Government based incentives to drive investment are in the form of income tax breaks and capital gains tax exemptions for investors. Effectively investors can offset 50 per cent of their investment against their income tax liability and then receive relief from any CGT liability when they sell the shares, if the shares are held for a minimum of 3 years.
Investment Scheme Requirements for Startups
There is a set of requirements that startups have to meet in order to benefit from the seed enterprise investment scheme. However, these requirements are to some extent fluid as they have been altered over time by the Government.

The key factors which disqualify startups from the scheme are that companies cannot:

raise more than £150,000 in total through the SEIS.
have more than 25 permanent employees in the company, in total;
have assets worth more than £200,000 before shares are issued in the company. In addition, the company cannot have been incorporated more than two years prior to issuing the shares.

Also, the startup company must exist wholly for the purpose of carrying on one or more “new” qualifying trades that have been stipulated in the legislation, and:

this excludes businesses such as property development and professional service firms
they also have to have a UK permanent establishment and must not be listed on a recognised stock exchange;
the company should not have had any prior investment under the EIS or VCT schemes.

Under the Finance Act 2003, another company should not control the startup.. Lastly, the company cannot be a part of a partnership.
Benefits for Startups from SEIS 
The most notable benefit is that, in the post- 2008 financial crisis economic climate, it is extremely difficult for startups to get bank loans with low interest rates that will not put pressure on the company.

SEIS provides startups the opportunity to raise capital in exchange for equity without dealing with banks.

There are also peripheral benefits from being involved in SEIS. Since SEIS is such a popular scheme, taking part in it enables companies to spread information about their startup. Even if investors do not invest, they may still contribute as customers. It also fosters appreciation for the company’s innovation and spreads its ideas, which may in turn attract investment.

An underrated advantage is also the fact that when an investor buys shares in the startup, not only do they get capital in exchange for equity, but they often bring expertise to the business. Many SEIS investors will look to invest in companies where they can add value and this is a vital benefit for startups under the scheme.
The Seed Enterprise Investment Scheme has been successful to date, according to its uptake.

The latest Government figures suggest that the scheme has generated approximately £135 million in capital for around 1,600 companies.

The SEIS has also become very popular amongst UK crowdfunding communities and websites which are already well aligned with startup culture in the UK. Businesses and investors interested in taking part in the SEIS should seek professional advice.

Why can’t you benefit as well?

Written by Drukker Solicitors advise startup businesses on UK based investment schemes to incentivise startups with financial assistance from the public sector. It is an alternative means of funding to assist startups get to market for commercial success.