Insights from a startup investor: Tips from VC Kiran Mehta
Get inside the mind of startup investor Kiran Mehta from Mercia Ventures for expert tips and inspiration on startup inve...
A problem that’s affecting some companies these days is investors blocking a sale of the company, forcing the company to go into administration.
In this video we explore the situation where, for SEIS/EIS investors, it’s actually better that your company goes into liquidation rather than you selling it, and how they can use their investor consent rights to block a sale, thereby forcing a liquidation of the company.
One of the big attractions of SEIS/EIS is that if the investor keeps their shares for three years and sells after that, they pay no capital gains tax.
But if they sell their shares within three years they will usually have to repay the SEIS/EIS tax deduction that they’ve already claimed.
The only exception is if the company goes into liquidation, which allows the investor to keep the original tax deduction, even during the 3 year SEIS/EIS holding period.
A growing number of founders are finding themselves in a difficult situation where they’re struggling to find investment for the next round, but they have an opportunity to sell the company. But the acquisition offer is not that great, maybe less than their last round valuation. And it’s within three years of the last round.
If this is the case, when you go to your investors to tell them that you’ve managed to save the company, instead of it going into administration you’ve found a buyer, you may be in for an unwelcome surprise: Instead of the investor being delighted that at least they’ll get something back, they try to block you selling the business, preferring that it go bankrupt.
How can this be?
The reason is that if SEIS/EIS investors have held their shares for less than three years, they may well get a better return on their investment
- by being able to keep their original SEIS/EIS tax deduction and claim a loss when the value of their shares goes to zero,
compared to
- having to repay their original SEIS/EIS tax deduction but getting back some money from their shares on a sale of the company.
This includes both a sale of the company for cash, and a share-for-share sale in the new company (other than in a very small number of situations where your cap table is mirrored in the new company, but this wouldn’t normally be the case for an acquirer).
In all cases, an investor will lose their SEIS/EIS and have to potentially repay their existing SEIS/EIS tax deduction if you sell within three years, unless the company goes into administration, when the three year rule is waived.
In the video we explain this in more detail, and also explore ways of keeping the company going until the 3-year period is met, which, if possible, might be the win-win for all.
