What to do with shares when your co-founder has left
Co-founder fallouts or mutual way-partings are common, so we’re often asked Now what do we do with their shares after th...
This video is part of a series of seven videos created by Anthony Rose, Founder and CEO of SeedLegals, who’d like to share his thoughts, advice, mistakes, and learnings from his extensive career in startups, so that you can avoid the same mistakes and get off to a running start when creating yours.
Summary:
We are blessed in the UK to have a very .com startup friendly government. If you want to start a company, you can register in around 15 minutes at Companies House for a huge sum of £12, it’s fantastic. The government helpfully offers various schemes to make it super attractive for budding entrepreneurs, and it doesn’t get much better than this.
The first scheme that you want to know about is the EIS and SEIS enterprise scheme. The details are a little bit long and complicated, but essentially these schemes mean that if you’re raising a fairly modest amount of money and certain conditions are met, then your shareholders can get a 30-50% tax write-off from their investment. High net worth individuals or anyone with a decent taxable income will find this very attractive. It can make it dramatically easier to fund your company if you structure it to be EIS or SEIS compliant.
To ensure compliance, you can go to HMRC and fill in a form. There are a couple of gotchas that you need to be aware of. Get these wrong and your investors aren’t going to be able to get their tax deduction, which will make them unhappy, and put off other potential investors.
The key gotchas are:
- To be able to claim an EIS or SEIS tax reduction, your investment must be a pure investment, i.e. not a loan or preference share. Typically, it needs to be in the form of ordinary shares, however, there are a few complicated workarounds that might do better.
- As a founder, even though you’re putting money into the business, unfortunately you most likely are unable to benefit from EIS or SEIS unless you have less than 30% equity in the business and are not a controlling part of the business.
- Finally, and probably the most serious and easy to avoid gotcha – you need to be very careful that you don’t give an investor shares before they have given you money. An investor can only claim an SEIS or EIS if they pay first. Get this wrong and you may find that you’re screwed later. It’s really important.
The Government has another really cool program which essentially says “For any of the development that you do that qualifies as research and development, you can get back roughly 26% of the costs”, this is amazing! As a startup this can be the difference between make or break for you.
But what exactly is R&D?
Your first job will be to convince the government that your work is R&D rather than marketing or something that has been done a million times before. You need to demonstrate what you’re doing is novel which may take some work.
You’re second job, will be to demonstrate that you have differentiated between what is R&D and what is just regular production. The good news is, until your App is launched, pretty much everything you do around building it will qualify as R&D. Once your app is launched, there may be maintenance, incremental additions etc. that you may not be able to claim.
The question now is, do you do the paperwork yourself or do you outsource this? There are a lot of companies that can help you, and you should be aware that it’s vastly a big rip-off market. Companies will be looking for 25% of the money you get back. If you’ve manage to raise a large amount and find you have £200,000 qualifying R&D costs, you could give away £30,000 – it’s nuts! You really don’t want to be giving away more than £3,000 – £5,000 for assistance on this and once you’ve done the first claim, perhaps using expert help, you want to be doing future ones yourself.
Entrepreneur relief is another great scheme which means that if you own more than 5% of the stock at the time a company is sold or you sell your stock, you will pay only 10% tax on the capital gain – this is amazing! It really is exceptionally founder friendly. Just be careful to ensure your equity doesn’t drop below 5%, unless of course you want to be paying the regular 20% tax level.
