How to invest in startups: step-by-step guide
Learn how to invest in startups and how to make your first angel investment with our step-by-step guide.
Get in at the ground floor of the next tech unicorn, cash in big at exit. That’s the ideal scenario. But the less established a company is, the less information you have to guide your decision to invest or not.
Luckily, the UK government sweetens the deal for investors who help risky, early-stage companies off the ground. HMRC’s Seed Enterprise Investment Scheme (SEIS) offsets some of the unknowns by giving investors generous tax relief.
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SEIS is just one of the UK government’s venture capital schemes that incentivise private independent investment into younger companies.
Through forms of tax relief, these schemes encourage investors to support early-stage startups. These startups tend to carry more risk than traditional investments like property and the stock market, but will go on to innovate, create jobs and grow the economy – all things the UK government is keen to promote. As a reward, the UK offers very appealing tax incentives to help lower the risk involved in startup investing.
You can claim tax relief from multiple venture capital schemes in the same year, so, for example, you can claim both SEIS and EIS tax relief at the same time.
Because SEIS is designed to support small, seed-stage businesses – aka, the very riskiest ones – it offers some of the most generous perks to investors of all the venture capital schemes.
Under SEIS, you get 50% back of the amount you invest as a reduction in your Income Tax bill.
When you come to sell your shares, usually you’d pay Capital Gains Tax on the profit you make. With SEIS, you get to keep it all, paying 0% CGT tax no matter how small or large the eventual exit.
You can offset 50% of Capital Gains Tax charges when you reinvest taxable profit made to a non SEIS-eligible company into an SEIS-eligible company.
If you haven’t made a profit when you come to sell your shares, you can set that loss against your Income Tax bill. See an example of how that works on this gov.uk page.
SEIS shares aren’t subject to Inheritance Tax, so long as they have been held for 2 years.
You can claim SEIS tax relief up to five years from the 31 January that follows the tax year in which you made the investment. It’s 31 January because that’s the deadline for self assessment tax returns.
If you don’t use all of your SEIS allowance (£200,000 per year), you can’t carry forward the SEIS limit to the next year.
But you can carry back SEIS tax relief to the previous year, if you haven’t already invested the maximum allowed under the scheme in that year.
The timing of your investment is key. Funds have to be invested before the shares are issued or on the same day. If funds aren’t received by the date the shares are issued, this is a disqualifying event for the scheme and you’ll lose the relief.
Funds can be invested before the share issue, but the gap should be minimal (unless you’re investing via an advanced subscription agreement). If the gap is too long, you risk the funds being deemed a loan which is another disqualifying event, meaning you’ll lose the relief.
To benefit from SEIS tax relief, you have to be a UK taxpayer.
There are various rules for both companies and investors. These rules exist to protect the spirit of the scheme – to reward investors for taking a risk on a small, newly established company that’s otherwise unconnected to their own financial interests.
See SEIS rules for investors for a full explanation of the rules.
SEIS rewards investors for supporting small, seed-stage startups.
To meet SEIS status, companies must:
For full details, see our article for startups on the SEIS company criteria.
So, you’ve found SEIS-eligible companies, checked they have SEIS Advance Assurance, completed the negotiations, and invested.
What happens next? How do you actually get the tax relief you were promised?
There are rules about when the company can complete the compliance steps. HMRC accepts compliance statements after the company has carried out their qualifying business activity for at least four months, or spent at least 70% of the SEIS amount raised.
Typically, HMRC reviews the company’s compliance application in about 15 to 45 working days.
To approve SEIS-qualifying status, HMRC sends the investee company two documents:
Claim your SEIS tax relief when you fill in your annual self assessment tax return. On the Additional Information page, under ‘Other tax reliefs’, enter the total you’ve invested in companies under SEIS (and any other Venture Capital Scheme you’re applying for).
If you don’t want to manage the investment process yourself, you can still benefit from SEIS tax relief by investing in an SEIS fund.
SEIS funds pool money from investors to spread across a portfolio of SEIS-eligible companies. The fund is responsible for due diligence and making sure that the companies in the portfolio qualify for SEIS.
Choosing between investing in an SEIS fund or directly as an angel investor involves trade-offs. SEIS funds offer diversification and professional management, while operating as an angel means you get more control over your investment and the full benefit of any potential return.
Investor Partnerships Manager,
Manage your deals on invest.seedlegals.com, the dedicated portal for angels and funds who’ve invested in startup companies.
Log in to see all your deals, view the total value of your investments, model exit scenarios, send out Term Sheets, negotiate directly on the document through comments, store your SEIS3 and share certificates.
To find out more about how we can help you streamline and manage your deals, choose a time for a friendly call with our investor team.