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. Thatâs 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. HMRCâs Seed Enterprise Investment Scheme (SEIS) offsets some of the unknowns by giving investors generous tax relief.
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Book a demoSEIS is just one of the UK governmentâs 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.
For example, say you invested ÂŁ10,000 in an SEIS-eligible company. When you file your tax return, you list the details of your SEIS-qualifying investment to reduce your Income Tax bill by ÂŁ5,000.
When you come to sell your shares, usually youâd 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 havenât 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.
Jonny SeamanThe scheme is powerful in its own right, and loss relief is the cherry on the cake when it comes to derisking. It means that if your investment doesnât work out, you can recoup a significant chunk of the lost money.
Investor Partnerships Manager,
SEIS shares arenât subject to Inheritance Tax, so long as they have been held for 2 years.
Jamie WilliamsAs the calculations show, there is significant benefit to an investor when a gain is made on an SEIS investment, but the scheme also minimises risk. Your total exposure as an additional rate taxpayer is just 27.5% on an SEIS investment.
Tax Director,
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. Itâs 31 January because thatâs the deadline for self assessment tax returns.
If you donât use all of your SEIS allowance (ÂŁ200,000 per year), you canât carry forward the SEIS limit to the next year.
But you can carry back SEIS tax relief to the previous year, if you havenât already invested the maximum allowed under the scheme in that year.
https://uk.linkedin.com/in/jamie-williams-1392a456?The timing of your investment is key. Funds have to be invested before the shares are issued or on the same day. If funds arenât received by the date the shares are issued, this is a disqualifying event for the scheme and youâll lose the relief.
Funds can be invested before the share issue, but the gap should be minimal (unless youâre 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 youâll lose the relief.
Tax Director,
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 thatâs 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, youâve 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 companyâs 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 âOther tax reliefsâ, enter the total youâve invested in companies under SEIS (and any other Venture Capital Scheme youâre applying for).
If you donât 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.
Jonny SeamanChoosing 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 whoâve 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.