The Seed Enterprise Investment Scheme: A U.K. Gem

 By Aron Solomon

The emergence of legal technology as a viable investment vertical isn’t something that happened overnight. As legal technology grew and we saw the first groups of companies that investors felt had a chance to win, ecosystems grew around these startups. Part of the beauty of a new vertical is that it’s possible, if you create and nurture the right conditions, to build it from scratch.

One of the reasons why Law Made is excited to be working with U.K. startups is a program called the Seed Enterprise Investment Scheme (SEIS). While it’s not a brand new program (it launched in 2013), it absolutely is an exciting one – they kind of program that can quickly turn a city of region into an investment hub. It’s also the kind of program that makes creating a new vertical – such as LegalTech – infinitely easier

The good people over at Crowdcube have some simple examples showing us how this all works. The assumptions here are that the investor pays income tax at 45% and capital gains tax at 28%.

Case 1: The company does well and doubles in value

Investment = £10,000

Income Tax Relief = £5,000 (you get 50% of your investment back as a tax bill reduction)

Profit from sale = £10,000

Capital Gains Tax = £Zero (if you have held the shares for three years)

Tax free return = £15,000

Case 2: After three years the company’s value is the samemika-ruusunen-10261

Investment = £10,000

Profit from sale = £Zero

Your gain = £5,000 reduction in your income tax bill


Case 3: The company folds and the shares hold no value

Investment = £10,000

Income Tax Relief = £5,000 (you get 50% of your investment back as a tax bill reduction)

At risk capital = £5,000

Loss relief = £2,250 (45% of at risk capital)

Your actual loss = £2,750 (£10,000 – [£5,000 + £2,250])

This is really pretty amazing and, anecdotally, we can share that the scheme has really worked. It’s not at all uncommon in the U.K. for a startup to be asked “are you raising your SEIS round,” as opposed to “are you raising your seed round.” Every government startup program in the world must dream of their program name becoming part of the verbiage of the industry.

If you’d like to learn more about SEIS, here is a set of some decent introductory resources. And, of course, if you’re a legal innovation startup in the U.K. and you’re like to explore working with us at Law Made – we’d love to hear from you.

What is SEIS

Crowdcube on SEIS

U.K. Business Tax Incentive Schemes

10 SEIS Facts for U.K. Startups

All of this said, there are some practical considerations for a startup considering raising a SEIS round in the U.K.

First, there is a cap of £150,000 on the amount of SEIS stock that can be issued per startup. The shares issued under SEIS can’t be preferred and need to be common (“ordinary”) shares.

Sadly, for the rest of us, the only investors to get tax relief under SEIS are U.K. tax payers. Neither international angels nor international syndicates get any tax relief. Aside from this downside to foreign investors, there are also a few for the startup to consider.

The first is that in a SEIS round that also brings in international investment, your international investors are going to (rightfully) demand preferred shares as they don’t have any of the benefits and surety of SEIS. In practical terms, this is a minimum of 2 term sheets, and possibly situations with 3 or more. Not ideal.

The second is that you need to have SEIS confirm/assure your startup that you’re actually eligible to be a part of the program. This isn’t really  an onerous process, but it’s one that you’ll need to be sure to begin before you’re actively raising the round as any investor looking to benefit from SEIS relief will demand that assurance.

SEIS is clearly an amazing program that, in the best possible case scenario, gives U.K. investors 103% (nope – not a typo) tax relief on their investment. Is this a program that other nations should adopt? While it’s still relatively early days for SEIS (going on 5 years) our own observation is that it has been a tangible spark for U.K. startups, both in the legal technology space and otherwise. And when compared against other national government initiatives aimed at helping startups, SEIS seems to have provided a quicker and, many would argue, better path to actual results for these companies.