Your investor has asked for preference shares. And they want SEIS/EIS. Can I do that?

Your investor has asked for Preference shares. And they want SEIS/EIS. Is that even possible, and what should you do?

In the UK, most angel investors have heard that if they want SEIS or EIS tax benefits for their investment, they can’t get Preference shares. And most founders have heard that if investors want SEIS/EIS they can’t get Preference shares. This has led to a thought pattern that early-stage investors in the UK have to get ordinary shares if they want SEIS/EIS.

But actually that’s not the case. Investors can get ordinary shares with a liquidation preference that gives them the same economic benefits as a preference share.

At this point I feel like an arms dealer selling AK-47s to both sides because I’m going to explain to investors that, yes, they should ask for a liquidation preference, and to explain to founders that it’s okay if an investor asks for that, but you probably shouldn’t offer it unless they ask, because it’s not in your interest.

Because early-stage investors in the UK usually get Ordinary shares, founders often panic when an investor asks for a Preference share. The UK is almost unique in the world: across most other countries, investors pretty much always get Preference shares.

Founders: If you come across an investor that wants a preference share, there’s no need to panic; just make sure it’s a 1x non-participating preference, as I explain in this video:

If you want to issue an SEIS/EIS compatible liquidation preference share to an investor, this article explains more and shows how to set that up on SeedLegals.

Here’s a summary of the points I covered in the video:

A common point of debate between founders and investors is whether investors should receive preference shares. Some founders worry that offering them could harm future fundraising, but that concern is largely misplaced.

Globally, preference shares are standard. The UK, however, is an outlier due to SEIS and EIS tax schemes, where early-stage investors typically receive ordinary shares instead. This has created a perception that preference shares aren’t compatible with these schemes, but that’s not entirely true.

What are Preference Shares?

Preference shares give investors priority when a company is sold. In simple terms, investors get their money back before other shareholders.

There are two main types:

• Non-participating preference: Investors receive either their initial investment back or their share of the proceeds, whichever is higher.
• Participating preference: Investors first get their money back, then also share in the remaining proceeds.

For founders, this can significantly reduce what they receive in a low-value exit.

Why investors want them

Preference shares protect investors, especially when they invest at high valuations in early-stage companies with limited financial data. If things don’t go as planned, they at least recover their initial investment first.

The SEIS/EIS workaround

While traditional preference shares can conflict with SEIS/EIS rules, there’s a practical alternative: liquidation preference structures.

Instead of investors being paid first, everyone is repaid their initial investment at the same time. Founders typically receive only a nominal amount (what they paid for shares), while investors recover their investment amount. After that, remaining proceeds are distributed proportional to everyone’s shareholding.

This structure preserves the economic benefits of preference shares while staying compliant with SEIS/EIS.

What should founders do?

• Prefer ordinary shares where possible, they’re more founder-friendly.
• Be aware that international investors will likely expect preference shares.
• Understand that offering preference shares won’t kill your company, but it does shift economic benefits on a sale of the company toward investors.
• Recognize that hybrid approaches are possible, with different investors receiving different rights.

Final takeaway

The UK’s approach to early-stage equity is unusual. In most of the world, especially in the US, preference shares are the norm, even for small investments.

For founders: Try to offer ordinary shares where you can, but don’t panic if investors push for preference shares.