What is a SeedFAST?
A SeedFAST is an SEIS/EIS-friendly way for startups to raise cash ahead of a funding round. It’s the SeedLegals brand name for our enhanced version of an Advanced Subscription Agreement (“ASA”).
SeedFASTs allow investors to subscribe for shares in the next funding round in exchange for their giving you money now. Our SeedFAST is a carefully worded, easy to understand document which complies with SEIS and EIS legislation.
It’s a quick and inexpensive way to raise funds from individual investors to continue growing your business without having to corral a group of investors into a funding round and having to agree a valuation, fixed close date and long-form legals.
Like all SeedLegals products, SeedFAST comes with our expert help and legendary customer support, all included.
How it Works
Similar to a convertible note, SeedFAST investors invest money now which will convert into shares at the next funding round, at a valuation to be determined at a future funding round.
SeedFAST investors are usually given a 10% to 20% discount, so that they get shares in the next round at a lower valuation than the investors in the round to compensate them for their advance investment.
If there is no next funding round within an agreed amount of time (the “long stop date”) then the investment will convert into shares then at an agreed valuation (the “low valuation”).
SeedFAST vs. Convertible Note
A convertible note allows the investor to get their money back e.g. on a sale of the company, and also to earn interest on their investment. But both of these render a convertible note ineligible for SEIS/EIS as the investment is treated as a loan rather than an equity investment.
Since the UK startup ecosystem is fuelled by SEIS and EIS investment, convertible notes have not proven popular in the UK, which has led to the development of the Advanced Subscription Agreement and our version of that, the SeedFAST.
Unlike a convertible note, with a SeedFAST the investment has to convert into equity either in the next funding round or at the long stop date if there’s no funding round before then.
For those cases where an investor isn’t looking for SEIS/EIS but does want interest or a return of capital, we also offer a SeedNOTE, our version of a convertible loan note.
It’s like a SAFE, for the UK
US investors will be familiar with a SAFE. Like SeedFASTs in the UK, SAFEs are a common way for US companies to raise investment ahead of a future round. If you have a US investor they’ll likely ask for a SAFE. If you’re a UK company that won’t work, SAFEs are designed for US law. You’ll want the legals to be UK law if you’re a UK company, so explain to your US investor that a SeedFAST is the UK version of a SAFE, and that’s the way to go.
SeedFASTs and SEIS / EIS
Convertible notes and SAFEs are popular in the US as a way of advancing cash to startups without having to close a funding round, which is often more expensive and time consuming. There are a number of advantages to convertible notes over a funding round, including that unlike a funding round you don’t need to set a company valuation, letting you get money in now to grow the company to reach a higher valuation ahead of your funding round.
But, convertible notes aren’t SEIS/EIS compatible (they fail the SEIS/EIS test because the investor can get their money back) and so they haven’t proven popular in the UK where early-stage funding rounds are heavily fuelled by SEIS and EIS investments.
So, an SEIS/EIS compatible alternative to a convertible note has been developed, commonly known as an Advanced Subscription Agreement, or ASA. We’ve built on that to include additional features and integrated it with our online signing process, cap table, share certificates and more, and called it a SeedFAST.
Maximum SEIS/EIS long stop date is now 6 months max
In order for an ASA or SeedFAST to be deemed an investment by HMRC rather than as a loan (which would make it ineligible for SEIS/EIS), HMRC had originally stipulated a maximum long stop date of 12 months – i.e. the investment has to convert into shares within 12 months, even if there is no funding round in that period.
But, starting Dec 2019, HMRC issued updated guidance to say that the maximum long stop date is now 6 months.
We contacted HMRC to clarify whether this applied to ASAs and SeedFAST made before that date or only to ones after their policy changed, and they confirmed that where ASAs were executed prior to 30 December 2019 they will be assessed per HMRC’s previous guidance, but the new maximum 6 month long stop date policy will apply to agreements executed after that date.
For investors who aren’t looking for SEIS or EIS, there’s no limit on the long stop date.
How do I create a SeedFAST
You can create a SeedFAST agreement on SeedLegals in less than 10 minutes. SeedFAST agreements are designed to be quick and simple so anyone can create their agreement at any time. But be sure to check the questions and tutorials carefully, and hit the chat button for any queries – we’re here to help. Our team of legal and funding experts will review your agreement once it’s ready for your investors to sign. Sign up to create a SeedFAST.
For a SeedFAST, when can my investor get their SEIS/EIS tax relief?
When you do a funding round, the investor sends you their money and gets their shares within a few days, so it’s clear and unambiguous which date and tax year applies to their SEIS/EIS investment.
But, what happens in the case of an SEIS/EIS investment made via a SeedFAST where the investment may only convert into shares months later after the next funding round – which data and tax year is the investment deemed to have been made in then?
The date that an investor’s SEIS/EIS investment is deemed to have been made is the day that they were issued their shares (it’s important that you only issue them their shares after you’ve received their money, otherwise their investment could be deemed to be loan, and they won’t get their SEIS/EIS). This means that the tax year in which the SEIS/EIS benefit is given is the tax year when the funding round took place, not the tax year in which the SeedFAST investment was made.
When you do a funding round, the investor sends you their money and gets their shares within a few days, so it’s clear which date and tax year applies to their SEIS/EIS investment.
At this point you’re thinking… if my investor invests via a SeedFAST now and I don’t do a new funding round until the next tax year, my investor won’t be able to claim SEIS/EIS for this tax year, which is going to make them a less likely to invest. While that’s true – they can only file their SEIS/EIS claim in the tax year in which their shares were granted – the good news is that HMRC allows investors to backdate their SEIS/EIS claim to the previous tax year, details here
So you can assure your investors that if they make investments in your company via a SeedFAST today, even if that SeedFAST only converts into shares in the next tax year, they’ll be able to retrospectively claim their SEIS/EIS tax deduction then, for this tax year.
Want to know more? Just hit the chat bubble to speak to the experts or book a call with a member of the SeedLegals team.