As I progress into the development of our first feature web app I’ve naturally been thinking about funding – and voraciously consuming everything I can on the same. As is typical, the quality and volume of online content in the UK on this matter is weak compared to the US. However, I did come across one very interesting development in the UK launched in 2012: The Seed Enterprise Investment Scheme (SEIS). Touted as long-standing Enterprise Investment Scheme’s “little brother” the benefits of SEIS look amazing on paper:
- 50% of the investment can be clawed back in tax rebate
- 100% of the investment can be set off any equivalent amount that is subject to Capital Gains Tax
- Maximum raise of £150,000
There are other T&Cs, of course, but they are relatively permissive and Indicago would certainly be a candidate. Here’s a use case:
Sally sells a rental property for a tidy profit and invests £20,000 in NewCo Ltd for a 2% stake. 50% (£10,000) of that can be clawed back in her annual HMRC Self-Assessment meaning her net investment is £10,000. Furthermore Sally can offset any Capital Gains Tax that would have been due on that £20,000 from the sale of her property – a saving of £5,600. In other words, of her £20,000 stake in NewCo actually costs her only £10,000 and saves a further £5,600 tax liability – a 78% net saving!
This is a great scheme for seed investors. There is, however, one obvious drawback: SEIS doesn’t cover Convertible Debt. Why on earth not? This is a classic example of good legislation that fails to acknowledge obvious trends. Given the difficulty in pricing startup businesses (which has been one of the key drives of Convertible Debt financing as it kicks the pricing conversation down the road to a properly priced financing round) I cannot see why Convertible Debt wouldn’t have been included in this scheme.
Which leaves me wondering: Could you structure an equity-based seed round (which subsequently takes advantage of SEIS) but where the equity stake ‘floats’, and is defined by any subsequent priced round?