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The weeks leading up to April 5 are always challenging for startups looking to close their SEIS/EIS rounds before the end of the tax year. This year, with the outbreak of coronavirus and its spread around the globe, things are way more fraught than usual. A couple of days ago I received an email from a founder (let’s call him John) laying out a scenario that’s being asked a lot at the moment.
- A few months ago I raised £35k through SeedFASTs.
- I had set those SeedFASTs to automatically convert in an upcoming round of £100K or more (including those SeedFASTs).
- I intended to do a £250K round (£150K in SEIS, £100K in EIS) to close at the end of March.
- All was going well, but just last week three investors got cold feet and pulled out of the round.
- I still have £55K pledged in the round, bringing the total to £90k including the SeedFASTs.
- So, I need to know what to do with those SeedFASTs – should they convert now, or later?
- And, should I do a £90K round now (of which £55K is new money), or keep looking for investors and aim to get to £200K+?
- Help! What should I do?
It turns out many companies are in the same position, and John is one of several incomings we had from founders who’ve seen investors pull out in the past few days and are looking for advice on what to do, so I thought I’d write this up for all.
For those who aren’t aware, a SeedFAST is SeedLegals’ hugely popular SEIS/EIS-compatible advanced subscription agreeement, used for raising ahead of a round. It’s the UK equivalent of a SAFE in the US.
All excellent questions! While the exact numbers are specific to John, many other startups are in a similar scenario right now.
My advice is don’t hang about. Close fast. When things take a turn for the uncertain (and, as many adjectives as you can use to describe the last week or so, uncertain is definitely one), you’re better off taking some money now rather than holding for more money later. As they say, a bird in the hand is worth two in the bush. Much better to have some cash in the bank and restructuring your plans to match than rolling the dice and waiting for a larger round to hopefully come together. Being an entrepreneur is all about knowing when to take gambles. Now is not one of those times.
Secondly, take advantage of the April 5 SEIS/EIS tax year. There are plenty of angel investors who will be actively seeking out tax deductions for this or the last tax year (investors can backdate their SEIS/EIS claim to the previous tax year).
Focus on getting as many investors as you can on board right now, with a promise of SEIS/EIS in this tax year, and a goal of closing the round by, for instance, April 2. Doing that would give you a few bonus days to sort everything out before the April 5 cut-off date for issuing shares in this tax year.
After talking with John, we suggested the following plan:
For those in a similar position, I’ll outline the step-by-step sequence for John to achieve his goals.
The sequencing is based on these two rules:
In order to hit his goals of quickly closing a smaller round, John needs to do the following:
At SeedLegals, we pride ourselves on giving you the tools to make startup funding faster, easier, better. While in many cases that means providing the technology platform to carry out a successful funding round, it also means being able to draw on our wide experiences gained building and growing startups to provide advice and answers.
By using SeedLegals for his earlier investments and his funding round now, in addition to the substantial cost savings of SeedLegals compared to a law firm, the huge advantage John has is the ease and speed at which he can adapt to changing conditions. In a matter of hours he completely restructured his round to close fast, top up later.
Have a question about closing your round? Contact us, we’re here to help!