For founders looking to set up or scale a UK business, a key issue is often capitalising their undertaking through investment, either themselves or by others (whom we shall loosely refer to as “investors”).
Capitalising a company primarily occurs in two ways: through debt or equity finance.
- Debt financing:
- involves borrowing money;
- subsequent obligation to repay the debt, usually in addition to interest;
- however, control of the company can usually be retained.
- Equity financing:
- involves selling off equity in the company to raise funds;
- there is no repayment obligation meaning there is more capital available to invest;
- however, some control of the company must be relinquished.
The UK offers tax incentives to investors in UK companies. Chief among these are the Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS). Each scheme has its own requirements and thresholds for qualification but broadly, they permit upon application and approval by HMRC (the government entity responsible for administering the UK tax regime), tax relief to investors of 50% and 30% (under SEIS and EIS, respectively) of their investment in a SEIS/EIS qualified company.
In addition, once the business reaches the stage where more capital is needed to scale an already proven concept or grow its sales and/or expand to new markets, venture capital (VC) finance could be an option depending on the founder(s)’s disposition and long-term goals.
VC finance often comes with “strings attached”, including significant involvement and control by the VC investor on the board and with respect to decision making in many areas (hiring management, bringing in new investors, selling the company, to name a few), as well as restrictions on the founders themselves (around transferring their shares, leaving the company, etc.) resulting in complexity at the board and shareholder level that not every business owner is disposed to tolerate.
For further advice and guidance on the fundraising and investment opportunities available for your UK business, please get in touch.
Tom Redfern Tredfern@redfernlegal.com
