How to close your funding round before the end of the 2023-24 tax year

With the end of the tax year fast approaching, we want to help you secure your funding before the deadline of 5 April 2024.

The good news is that this time of year is typically busy for closing deals. At SeedLegals, we see a big spike in the number of funding rounds we close in March. In 2021, 2022 and 2023, we closed 100% more rounds in March than in January or February. This year, we expect the same pattern to emerge – March looks set to be very busy again.

In this post, we cover what you need to do to close your round before the end of the tax year.

Contents

• Make the most of the funding hot-spots
• Push to close a deal now? Or use agile fundraising?
• Get your SEIS/EIS Advance Assurance well before the tax year end deadline
• Compile your Term Sheet
• Timeline: How to close SEIS/EIS funding before 5 April 2024
• If close by 5 April isn’t going to happen, here’s what to do
  – Go agile with SeedFAST
  – For complex deals before a round, use a convertible loan note
  – Top up a previous round
• Fundraising shouldn’t be taxing

Make the most of the funding hot-spots

At SeedLegals, we close one in every six early-stage funding rounds in the UK – more than any other service. From the data we have from all these deals, we’ve observed three spikes of fundraising activity every year:

1. End of the tax year
   The weeks leading up to 5 April are busy, particularly for SEIS and EIS rounds. Investors are keen to get deals closed to make sure they get the maximum tax relief in the current tax year.
2. Just before summer holidays
   Traditionally (at least before the pandemic), many investors take time off in August. If your deal isn’t done by the end of July, it probably won’t be closed until September or later, hence why founders and investors are keen to complete before August.
3. Run-up to Christmas
   Similar to the summer holiday shutdown, this spike in activity appears to be so that founders and investors can get all the paperwork done and deals closed before taking a break for the festive weeks.

You could use the momentum at these three busy times to close your funding round – or you could take a more agile approach…

Push to close a deal now?
Or use agile fundraising?

If you want to make the most of the momentum to close your fundraising round before the end of the tax year, then it pays to have everything you need lined up – in particular, your S/EIS Advance Assurance and Term Sheet. There’s more on these below.
If some investors are ready to invest now and others are moving more slowly, you could use an agile fundraising method, such as our SeedFAST or SeedNOTE, or top up a previous funding round.

First, let’s take a look at two must-haves if you want to close a round this quarter…

Get your SEIS/EIS Advance Assurance well before the tax year end deadline

A first step for many founders when fundraising is to apply for SEIS/EIS Advance Assurance from HMRC. This assurance shows that an investment in their company meets the requirements of the Seed Enterprise Investment Scheme, or the Enterprise Investment Scheme. Many investors will only consider investing in a company that’s got this assurance because it means they’ll get tax relief on their investment. Advance Assurance sets you apart from other companies as a very attractive investment opportunity.

Why does SEIS/EIS mean there’s a rush to get your deal closed by the end of the tax year? Because the tax relief can only be applied to the year shares are issued or for one year beforehand. If investors have allowance left over, they might be keen to use that allowance before the end of the tax year.

How SEIS/EIS works

The Enterprise Investment Scheme and Seed Enterprise Investment Scheme allow investors to claim tax relief on the money they invest in your company. Investors can claim Income Tax relief at 50% for SEIS investments of up to £200,000 each tax year (before 6 April 2023, the limit was £100,000). And for the EIS, it’s 30% on investments of up to £1 million.

Since the EIS was introduced by the Government in 1994 to the end of the 2021-22 tax year, over 33,000 UK companies have received investment through EIS worth over £24.5 billion, according to HMRC. SEIS was established in 2012 and for this scheme, up to the end of the 2021-22 tax year, HMRC calculates over 14,000 UK companies have received over £1.5 billion (source). These huge amounts prove that the schemes make investing in early-stage companies an attractive prospect for investors.

At SeedLegals, our expert team can review your S/EIS application in five days or less. We can help you get your Advance Assurance fast – our success rate is 98%. Here’s how:

MORE: Apply for S/EIS Advance Assurance

If you’re keen to get Advance Assurance, factor in that it could take up to 45 days – so you might want to get moving on this ASAP. The time it usually takes for Advance Assurance applications done with SeedLegals is one to two weeks. As we get nearer to April, this time is likely to get longer because HMRC will be processing more applications.

Compile your Term Sheet

When you start fundraising, you’ll need to prepare a Term Sheet: it’s a summary of the investment terms and a very handy tool to have ready when you’re approaching investors.

We often get asked: ‘But isn’t it the investors who send the Term Sheet?’ Often it is. But it doesn’t have to be. In fact, we recommend you get on the front foot by creating your own Term Sheet. Here’s why it’s smart to prepare your Term Sheet before you meet investors:

• Know what you’re asking for
  When you compile the Term Sheet, you have to think through exactly what you want. This can kickstart your conversations and give you the upper hand in negotiations with investors because you’ll know exactly what to ask for.
• Show you’re serious
  Investors who put money into early-stage businesses need to know the founders are reliable. By having your Term Sheet ready, you’ll show a level of professionalism that will set you apart from the rest.
• Be ready to follow up
  If you’ve pitched to an investor and it seemed to go well, it can be frustrating to hear nothing for a week… or a fortnight… If you have your Term Sheet ready, you can follow up by pinging over the document soon after your pitch.
• Generate some FOMO
  When you send your Term Sheet to investors, this can imply you’re negotiating with other investors. Show potential investors you’re keen to move quickly – give them the FOMO (fear of missing out).

On SeedLegals, you can create your Term Sheet in minutes. Select from options for each term (there’s guidance built in) and your document is generated automatically. You can then send it to potential investors via SeedLegals.

It’s normal to do plenty of negotiation about the Term Sheet because it includes so many details such as the valuation, vesting schedules, reporting requirements and founder salaries.

💡 Tip: It’s worth putting effort in to get your first investor on board – we’ve noticed that when founders have got this first signature, it’s generally easier to get subsequent investors to sign (and therefore close the round faster).

But does preparing your Term Sheet really help you speed up closing your round? Our data says yes: on average, companies close their funding round 30 days after sending out their Term Sheet.

Timeline: How to close SEIS/EIS funding before 5 April 2024

• Now and ongoing
  – Find, approach and schedule meetings with potential investors. If you want to close by the end of this tax year, intensify your investor outreach in January and February.
• 1 – 9 February 2024
  – Prepare your application for SEIS/EIS Advance Assurance on SeedLegals
  – Send for review by SeedLegals experts
  –  Feedback and finalise your application
  
• Week starting 12 February
  – We send your application for Advance Assurance to HMRC on your behalf.
  – For investors using next year’s allowance for tax relief, you can send them SeedFAST agreements. For investors using this year’s allowance for tax relief, send them a Term Sheet for your funding round.
  – Be prepared for negotiations at this stage to take around one month. No need to wait – you can negotiate terms with your investor while your Advance Assurance application is with HMRC.
• Before 22 March 2024
  – Receive your Advance Assurance from HMRC
  – Inform investors that you have S/EIS Advance Assurance
  – Investors send their funds
  – Everyone signs the Resolutions
• 22 to 26 March 2024
  – SeedLegals experts complete a final review of your round to make sure everything is correctly complete
  – Close your round
• On or before 5 April 2024
  – Issue shares to your investors
  – Complete and send form SH01 to Companies House to inform them about the new shareholders
• Anytime after 5 April 2024
  Top up your round. Don’t delay closing your round because you have an investor (or investors) who is late sending their funds. Instead, close your round with ‘top up’ enabled, and add the late investors with an Instant Investment later on.

If close by 5 April 2024 isn’t going to happen, here’s what to do

What if you’ve got your S/EIS Advance Assurance and a beautifully clear Term Sheet but some of your potential investors are moving at snail’s pace while others want to jump in right now? Will you close before the end of the tax year? Will it be six months before you close? Are you going to have to re-mortgage to tide over your company?? 😱 No – there’s no need to panic. If you have investors ready now, this is where agile fundraising comes in handy. We want founders to have flexibility in their fundraising so we built ways for you to take one-off investments before or after a round. Next, we explain how to do this…

Go agile with SeedFAST

You can issue a SeedFAST (our ‘advanced subscription agreement’) to new investors at any time. They allow investors to sign up to get shares in an upcoming funding round, in exchange for giving you money now – super handy to tide you over between funding rounds.

For a SeedFAST, you don’t set a valuation. Instead, your investors get their shares (usually at a discount) when you close your next funding round. SeedFASTs are carefully worded, easy to understand and – importantly – comply with SEIS and EIS rules. Because SeedFAST is so straightforward, it’s normal for investors to sign them within 24 to 48 hours of receiving the document. This means you get an instant injection of cash without weeks or months of negotiations. We explain more in these posts:

• SeedFAST, the SeedLegals Advanced Subscription Agreement: the money now, shares later funding model
• How to pick the right deal terms for your SeedFAST

For complex deals before a round, use a convertible loan note

If you have an investor who’s ready to invest before your round and wants interest or a return of capital, you can use our convertible loan note, SeedNOTE.

☝ Note: SeedNOTEs / convertible loan notes aren’t compatible with S/EIS investments.

Investors like convertible loan notes because if your company is insolvent or looking to liquidate or wind up, debt ranks higher than equity. And this type of agreement gives investors their money back if your company fails to raise a ‘qualifying funding round’.

We explain more in this post: SeedNOTE – how convertible loan notes work

Top up a previous round

If you have some investors ready to sign now but some who aren’t, with SeedLegals you can build into your funding round the ability to top up the round after it’s closed without having to get further consent from your existing investors.

With our Instant Investment, you add terms to your round to allow you to close your round when you reach an amount you’re happy with (or the amount you’ve been able to raise right now) and then top up later, within agreed limits.

Find out more about how these work in our post: Instant Investment – how to top up your funding round

Fundraising shouldn’t be taxing

Running a company is stressful enough – with careful preparation for your round and agile fundraising, you can take in a significant amount of money now to take away the stress of closing by a deadline.

Are you aiming to close your round by 5 April 2024? Or will you use agile fundraising? Let us know, we love to hear from you: [email protected]

To find out more about how SeedLegals can help with your fundraising legals, book a free chat with one of our funding experts.