SEIS and EIS investment agreements allow eligible UK companies to attract investors by offering tax reliefs in exchange for equity. Understanding these schemes helps early-stage founders and e-commerce sellers decide whether to pursue this type of funding and what to expect in the legal documents.
Both schemes are designed to encourage investment in higher-risk startups by providing tax incentives to individuals. The agreements and term sheets set out the rights of investors and the obligations of the company, so reviewing them carefully is essential before accepting funds.
What Are SEIS and EIS?
The Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS) are UK government initiatives that offer tax reliefs to individuals who invest in qualifying early-stage companies. SEIS typically applies to very early companies while EIS can be used by slightly more established ones. Both require the company to meet specific criteria around trading activity, permanent establishment in the UK, and use of funds.
Founders must ensure their business structure, such as operating as a limited company rather than a sole trader, aligns with the rules. These schemes cannot be used by companies carrying out certain excluded activities. Always verify current eligibility on GOV.UK because qualifying conditions change over time.
Tax Reliefs for Investors
Investors can receive income tax relief on the amount invested, subject to annual limits that change. The relief reduces the investor’s income tax bill in the year of investment. Capital gains tax relief may also apply on disposal of the shares if held for the required period.
Loss relief is available if the investment does not succeed, allowing investors to offset losses against income or capital gains. These incentives make it more attractive for individuals to fund early-stage e-commerce and technology businesses. Check HMRC guidance regularly as the exact relief percentages and limits are updated periodically.
From the founder’s perspective, the tax reliefs do not directly benefit the company but make it easier to raise funds without offering large equity stakes. This can preserve more ownership for the founding team in the long term.
Obtaining Advance Assurance
Before approaching investors, companies can apply to HMRC for advance assurance. This process involves submitting detailed information about the business plan, intended use of funds, and company structure. HMRC reviews whether the company is likely to qualify for SEIS or EIS.
The application should include a business description, financial forecasts, and confirmation that the company meets the independence and gross assets tests. Preparing clear documents increases the chance of a positive response. It is advisable to seek professional help when completing the forms because errors can delay or prevent approval.
Advance assurance is not a guarantee of final qualification but gives both founders and investors greater confidence. Many investors will ask to see the assurance letter before committing funds. The process can take several weeks, so factor this into your fundraising timeline.
Investor Rights in SEIS and EIS Agreements
Investment agreements give investors certain protections and information rights. These often include the right to receive regular updates, attend board meetings as an observer, or receive financial information. Investors may also have anti-dilution protections that adjust their shareholding if future funding rounds occur at a lower valuation.
Drag-along and tag-along rights are common. Drag-along allows majority shareholders to force minority shareholders to join a sale of the company. Tag-along gives minority investors the right to join a sale on the same terms. These clauses protect both founders and investors but can limit flexibility.
Founders should understand how these rights affect day-to-day decision making and future fundraising. Reviewing the agreement with an experienced advisor helps identify any terms that could restrict growth or create unwanted obligations.
Typical Term Sheet Clauses
A term sheet outlines the main commercial terms before detailed legal documents are prepared. Common clauses include the investment amount, valuation and type of shares (ordinary or preference), board representation, and conditions precedent to investment.
Other frequent provisions cover warranties given by the company and founders, restrictive covenants preventing founders from starting competing businesses, and liquidation preferences that determine payout order if the company is sold or wound up. The term sheet may also specify milestones that trigger further tranches of investment.
Negotiate key points such as the level of warranties and the length of restrictive periods. Be realistic about what investors will accept while protecting the interests of the founding team. Once signed, the term sheet is usually non-binding except for exclusivity and confidentiality clauses. Move quickly to full legal agreements once terms are agreed.
Practical Steps for Founders
1. Confirm your company is incorporated as a limited company via Companies House and meets basic trading requirements.
2. Prepare a clear business plan and financial forecasts that show how the investment will be used for growth.
3. Apply for advance assurance from HMRC before approaching potential investors.
4. Draft or review a term sheet with professional advice, focusing on valuation, investor rights and founder protections.
5. Ensure all contracts, terms of service, GDPR compliance, trademarks and insurance are in place, as investors will review these during due diligence.
6. Keep detailed records of all communications and decisions to demonstrate compliance with the schemes.
Take time to understand each clause rather than rushing to close the deal. Small changes in wording can have significant long-term effects on control and exit options.
Final Considerations for UK Startups
SEIS and EIS can be valuable routes to funding but require careful management of compliance and investor relationships. The administrative burden includes ongoing reporting to HMRC and maintaining eligibility throughout the investment period. Founders should build these responsibilities into their operational plans from the start.
Organisations such as Loomworks provide free desks, a registered address and mentoring to selected early-stage founders, helping reduce overheads while you focus on building the business and managing investment processes. Always consult current GOV.UK and HMRC resources or seek specialist professional advice because rules and requirements change regularly.
Frequently asked questions
What is the difference between SEIS and EIS?
SEIS is aimed at very early-stage companies and offers higher rates of tax relief to investors, while EIS applies to slightly larger or more established businesses. Each scheme has different limits on the amount a company can raise and different qualifying criteria. Check the latest GOV.UK guidance because the rules are updated from time to time.
Do I need advance assurance before raising SEIS or EIS investment?
It is strongly recommended. Advance assurance from HMRC gives investors confidence that the company is likely to qualify. The process involves submitting your business plan and forecasts. Without it many investors will not proceed. The application can take several weeks so plan ahead.
What investor rights are typically included in these agreements?
Common rights include information and update rights, board observer status, anti-dilution protection, and tag-along or drag-along provisions. These clauses balance investor protection with founder control. Review them carefully with an adviser to understand their long-term impact on decision making.
Are term sheets legally binding?
Most of the commercial terms are not binding until full legal agreements are signed. However, clauses covering exclusivity, confidentiality and costs are usually binding. Treat the term sheet as a serious commitment because changing terms later can be difficult and may damage trust.
How do SEIS and EIS affect my exit options?
Investors will expect their shares to qualify for capital gains tax relief, which usually requires holding the investment for a minimum period. Some clauses may influence sale processes through drag-along rights or preferences on proceeds. Understanding these terms early helps you plan realistic exit timelines.
Related reading: How to Ensure Proper IP Assignment from Founders and Contractors, Registering Charges and Security at Companies House, Do Private UK Companies Need to Hold an AGM?. Browse all company admin & legal guides or apply to Loomworks.