The startups that DMG Syndicate Members invest in have all been eligible for EIS relief. And long may this continue - EIS is a UK Government scheme and we’ve seen how much of a positive impact it has had on the UK startup and angel investing ecosystem over the years. But what does that mean for angel investors? What are the pro’s and con’s here?

If you have UK income tax you can benefit (even if you don’t live here)

Under the Enterprise Investment Scheme (EIS) angel investors can gain both income tax and capital gains tax relief when they invest in startup companies that qualify. The initial income tax relief is 30% therefore a £10,000 investment is effectively a net outlay of £7,000.

To be benefit under EIS, angel investors must be investing as an individual but do not need to be a UK resident. They must, however, have UK income tax liability against which to set the relief. The angel investor can make the subscription through a nominee (the DMG Syndicate operates with a nominee structure).

Angel investors must check that both themselves and the company qualify for EIS. Companies can only raise certain amount under the scheme from certain people and entities (e.g. employees and VC funds cannot claim EIS).

What about if a startup exits?

Under current rules there would be no Capital Gains Tax (CGT) charged on any gain of EIS shares that are sold after the minimum 3 year holding period.

What if the startup fails?

If EIS shares are disposed of at a loss at any time, the loss (after any Income Tax relief has been taken into account) can be offset against income for that year and the previous year. There is a maximum exposure of 38.5p in the pound for a 45% income tax payer.

How is the tax relief claimed?

Angel investors can include details of the investment in the self-assessment return to HMRC. HMRC doesn’t always require angel investors to send the EIS certificates with the self-assessment, however you might be asked you to produce the certificates and therefore should keep them safe.

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The main points above are for the typical DMG Syndicate investor. Further details can be found on the HM Government website, here, or if you have any questions about the DMG Syndicate please email Matthew.

Please note: the information and any commentary contained in this article is for general information purposes only and does not constitute legal, tax, finance or any other type of professional advice. Dot Matrix Group Ltd does not accept and, to the extent permitted by law, excludes liability to any person for any loss which may arise from relying upon or otherwise using the information contained in this article.

A couple of startups in the DMG portfolio have raised funding through an Advanced Subscription Agreement, or ASA. ASAs are becoming more popular in the UK, so it’s worth taking some time to understand why one might be a good thing for the startup and for the investor.

A typical funding round for early stage startups can take, on average, 6-9 months from the point the founders decide to seek investment until all the money is in their bank account. However startups often need to move at a faster pace than this and there may be a case for raising a smaller sum and not wanting to commit the time, effort and cost to negotiating a full fundraise with its timelines, ‘herding’ activities and full set of documents.

On the investor side, most in the UK are looking for the SEIS/EIS tax relief that investing in early stage startups can bring. ASAs have been developed in the UK as an alternative to the Convertible Loan Note but they are not SEIS/EIS compliant (they’re called ‘convertibles’ because the money going into the startup is actually a loan but there is the anticipation that it will convert to equity at a later date. For investments to qualify for SEIS/EIS relief the money invested must be ‘at risk’ from the outset and under a convertible loan note it is possible for the investor to be repaid before the loan converts into shares so that wouldn’t count. With an ASA the investor cannot recover the capital as it goes towards the issue of shares under every eventuality.

WHAT IS AN ADVANCE SUBSCRIPTION AGREEMENT?

ASAs enable a startup to get funds into the company from investors quickly and in advance to being issued any shares.

Typically, ASAs have the following features:

The money from the investor to the startup will go towards the issue of shares in the next qualifying funding round
Investors receive a discount (often in the 10% to 30% range) on the issue of shares. This is because they have some additional risk from investing in advance
There is a long stop date so the advanced capital will definitely be applied to the issue of shares regardless of the funding outcome (in order to qualify for SEIS/EIS relief
Some warranties are given by the company, for example, the company is not insolvent, has authority to enter into the agreement and it is not involved in any disputes

ASA ADVANTAGES

ASAs have the following advantages:

They are relatively simple agreements so can be free from heavy negotiation and long timescales
Investors usually receive a discount on the issue of shares
The startup does not need to set a definitive valuation (this is done at the next equity round)

Please note: the information and any commentary contained in this article is for general information purposes only and does not constitute legal or any other type of professional advice. Dot Matrix Group Ltd does not accept and, to the extent permitted by law, excludes liability to any person for any loss which may arise from relying upon or otherwise using the information contained in this article.