Raising investment? Here’s how to close before the end of the tax year

We hope you had a great 2021! Time to focus on growing our startup in 2022 and this decade. Typically many founders are looking to revive external investment to focus on scaling their start-up.

Interestingly, we’ve noticed that there are three peaks in the fundraising calendar.

1. The run-up to Christmas is the most frantic peak with both investors and founders wanting to get the paperwork done before the festive break.
2. The second is the end of the tax year (April 5th), especially for SEIS and EIS deals. Investors are desperate to close deals that ensure their tax relief in the current year.
3. And finally, the run-up to the August holiday season. People go on holiday and if a deal isn’t done by the end of July you’ll probably have to shift your close to September, hence the pre-holiday rush.

Great news, we’re in the second peak.

This run-up to the end of the tax year is a frantic time for investors as they are looking to maximise their SEIS/EIS allowance by closing their investments before the end of the financial year.

In the 19/20 tax year we saw funding for the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) tax reliefs pass the £2.075 billion mark. With EIS scheme experiencing a larger increase of £38 million (HMRC)

As a founder, this is great news. Our investors can claim SEIS Income Tax relief at 50% of the amount invested in the tax year in which the investment is made, for up to £200,000 of investment per year (before April 2023, there was a personal investment limit of £100,000 per year)! For EIS investment, they can claim 30% for up to £1,000,000.

Important to know that SEIS allowance can be claimed for this tax year AND the preceding tax year (known as carry-back).

If, for example, your investor invested £50,000 SEIS/EIS in this tax year (2019-20 tax year), they can claim income tax relief against their tax for this tax year or they can carry back to the previous tax year (2017-2018).

The first step is typically to apply for SEIS/ EIS Advance Assurance, as the Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS) are two of a number of UK government initiatives that encourage innovation by granting private investors a significant tax break when investing in early-stage, high-risk companies.

In the UK, many investors also will only invest in businesses that have received SEIS Advance Assurance – an approval process that lets investors get tax relief from investing in early-stage startups. To get approval for your company, you’ll need to line up a few initial investors to add to your application to demonstrate investor interest, and then you can do your SEIS/EIS Advance Assurance on SeedLegals. Then…

How to close your investment before the tax year end

A funding round

Once you have investors interested and committed to investing in your business – you’ll need to send them a summary of investment terms – called a Term Sheet. Term Sheets are where a large amount of negotiation can happen as they include not only the valuation but also things like vesting, reporting requirements and even your salary! Our data shows that on average founders close their funding round 30 days after unlocking their term sheet

Having the first signee has been proven to increase the probability of subsequent signature from investors & ultimately the successful raise this is due to the well-known bandwagon effect

Instant Investment

One reason why rounds do not close promptly is that founders have a number set in mind for the investment they need to raise to allow them to progress and hit their next ambitious targets. The Seed Round package allows us to outline the minimum amount of investment needed to close a funding round. You can see it below

Founder may choose to close smaller rounds using our Seed Round package and top up using the Instant Investment– allowing you accept new investment into your startup at any time within a time frame that you and your investors agree upon or you may chose compete a smaller round and then close a larger funding round at a later stage during the year. Perhaps during the third peak of the fundraising calendar – the run-up to the August holiday season

SeedFAST

SeedFAST is an Advanced Subscription Agreement that can be issued to new investors at any time and allows investors to subscribe for shares in the next funding round, in exchange for their giving you money now. SeedFAST is a carefully worded, easy to understand document which complies with SEIS and EIS legislation – read all about it here.

So, a few strategies that can be used to allow you to take in investment before the end of the tax year. Which of the above are you going to use? Unsure? That’s okay, book some time with one our experts who will walk you through the best option for you.