Victoria Ferguson, general counsel at MMC Ventures, explains why tech entrepreneurs should consider taking EIS money.
Contemplating taking funding from an investor who raises its funds using the UK EIS tax relief can make management teams nervous.
There are lots of myths about how difficult it is to get, what you can’t do once you have the money, how it jars with other investors and generally how painful it is.
I want to de-bunk a few of these and show that taking EIS money is as easy as other types of funding and even has some advantages.
- Myth: EIS has loads of rules. Sure, when you first look at what a company must ‘be’ to qualify, it appeats to be a long list. But, read it closer: if you are an early-stage tech company looking for Series A investment, then you already qualify.
- Less than £15m of assets.
- Fewer than 250 employees.
- Trading for less than 7 years.
- Not on a blacklist of excluded trades (forestry anyone?).
- Myth: EIS is only for UK companies. Wrong. Any nationality of company can take EIS money. The company needs to have a “permanent establishment” in the UK, but that is a case of having boots-on-the-ground here; it does not need to be headquarters, or a majority of staff.
- Myth: EIS can only be used in the UK. Nope. Funds can be used in any country.
- Myth: EIS can only be in ordinaries. EIS can go into any class of share and have many of the same rights as the shareholders in that class. If other investors have anti-dilution, for instance, VCs will simply exclude themselves from it.
- Myth: It limits how much you can raise. There are limits on the amounts that a company can raise of what is called “state aid” money. This can include EIS, SEIS, VCT and some R&D grants. Those limits can be up to £10m in any calendar year, and up to £20m over a lifetime. That is still a fair amount of money available to a company. Also, there are no limits on raising any other kind of money.
- Myth: It’s really easy to trigger losing EIS. It’s true, there are various ways that EIS relief can be withdrawn — most notably a change of control of ownership in the company. But these tend to be very active decisions of the company — accidentally tripping up is quite hard — and experienced VCs and investors can guide the you through this. Besides, it only lasts for three years.
- Myth: OK — but VCs are only concerned about tax and won’t let me take decisions, which lose your investors. VCs using EIS funding are concerned about the commercial return, not about tax. They will make the best commercial decisions for the company.
- Myth: EIS takes forever to get clearance. Companies can get clearance in a day. Admittedly, most take a while longer, sometimes much longer. At the time of writing this, we are seeing four to five weeks as the typical turnaround time. I like to submit documents which are substantially complete, but there will often be a few last corners to agree so not all the time is spent waiting. To show how serious they are, VCs are often happy to do a split exchange and completion. So, they agree the documents and sign them, and fund once EIS clearance is in. There are no MACs or other conditions, simply receipt of clearance.
- Myth: Investing alongside EIS makes it trickier for everyone else. Hopefully you can now see that there is no reason to be apprehensive about taking EIS money, particularly from an experienced, commercially-driven fund. But there’s no need to take our word for it. VCs typically invest alongside UK and international funds; VCs, public money and corporates and are typically happy for you to reference them with UK and international co-investors.
You said there were some advantages. How is EIS better than institutional funds?
- Most EIS Funds are always open — “evergreen” in the jargon. They don’t typically have 10-year fund cycles. That means they don’t need to sell companies early to make a nice narrative for the next fundraise or because partners want to get their carry out.
- Similarly, EIS Funds won’t usually have percentage limits on how much it can invest into a company or limits because “that was Fund I”.
- EIS Funds tend to be more flexible. They fundraise differently so can quickly adapt to changes in investment sectors or round sizes and invest accordingly.
- Rather than distracting the investment team every few years, EIS fundraising is usually done by a professional, specialist team leaving deal teams to focus on new investments and portfolio support.
 Material Adverse Clause — i.e. something bad has happened to the company