UK term sheet SEIS EIS: checks across a funding round

What to take away

This UK term sheet SEIS EIS guide focuses on checks that keep a proposed share issue consistent with the schemes.

A SEIS or EIS term sheet must name the tests the company has to meet, and those tests differ by scheme.
SEIS allows £250,000 per company over its life; EIS allows £5m a tax year and £12m over the company's life.
Advance assurance, the articles and the shareholder agreement must describe the same share issue, or HMRC may decline to confirm relief.
Founders carry most risk in wide pre-emption waivers, anti-dilution wording and bad leaver pricing.

The qualifying tests the clauses must mirror

A scheme term sheet sets out the amount, price, instrument and investor rights. It should also point at the scheme conditions, which limit what the company may do next.

The clause should name the right scheme. SEIS and EIS shares carry different limits, so a mixed round needs a schedule saying which shares are which. Our guide to SEIS and EIS for startups explains how to choose.

The qualifying tests

SEIS

Company limit: £250,000 lifetime
Investor limit per tax year: £200,000
Income tax relief: 50%
Gross assets before issue: £350,000
Employee limit: 25
Trading age: 3 years from first commercial sale

EIS

Company limit: £5m a year, £12m lifetime
Investor limit per tax year: £1m
Income tax relief: 30%
Gross assets before issue: £15m (£16m after)
Employee limit: 250
Trading age: 7 years from first commercial sale

Re-check the figures when drafting. The EIS application guidance lists the current tests, including the risk-to-capital condition.

The Income Tax Act 2007 sets the risk-to-capital condition for SEIS and EIS: the investment must support the company’s growth and development, and there must be a significant risk that investors lose more capital than they gain as a return. The term sheet should identify the actual trade and intended use of the subscription money, rather than relying on “general corporate purposes” alone. Check those activities against the excluded activities in Schedule 16 to the Act; wording cannot make an excluded activity qualify.

A sale right that may affect relief

A term sheet may give investors a right to force a sale, but an unconditional right to force an exit at any time can raise a scheme-qualification concern as well as a holding-period issue. A founder may read it as standard exit protection.

A disposal within the three-year holding period may lead to relief being withdrawn, subject to the scheme rules and exceptions. Separately, an exit right or other arrangement that protects investors from the risk of loss may conflict with the risk-to-capital condition, so do not assume a long-stop date or reorganisation carve-out fixes the issue.

Advance assurance wording and the HMRC process

Advance assurance is optional. It is HMRC’s indication, based on the information supplied, that a proposed share issue is likely to qualify; it is not a guarantee that relief will ultimately be available. Some investors may ask to see it before they subscribe.

Apply to HMRC's Venture Capital Schemes team through the advance assurance service. You supply company details, the share issue, the amount, the trade, the use of funds, the articles and any shareholder agreement.

A workable clause reads:

The Company confirms that it meets the qualifying conditions for the scheme in Schedule 1 and will apply the Subscription Monies only to its qualifying business activity.

Common mismatches are share class, amount and use of funds, so fix these before the application goes in. The related compliance guide covers the compliance statement that follows completion.

Advance assurance match checklist

Same share class in term sheet and application
Same amount in both documents
Same use of funds in both
No fixed return that looks like a loan
Trade cannot be changed freely
No new subsidiary before application

A later change to the term sheet, such as a new share class, should be reported to HMRC before completion.

Share terms to review for founder impact

Pre-emption rights let existing shareholders buy new shares before anyone else. Investors usually ask for a waiver so the round completes quickly.

A narrow waiver names the round and the number of shares. A wide waiver covers any future issue and can dilute a founder without a further vote.

Anti-dilution adjusts the conversion price of preference shares in a down round, and should not also remove founder pre-emption rights.

Check the share conditions in the Income Tax Act 2007: SEIS and EIS shares must not be redeemable or carry a preferential right to assets on a winding up. Term-sheet, articles and side-letter provisions must not guarantee capital back or otherwise insulate investors from loss. Review liquidation preferences, exit rights and anti-dilution terms against the scheme conditions, not just their effect on founder dilution.

Leaver clauses define good and bad leavers, then set the price. A bad leaver forced to sell at nominal value can lose years of value, so keep the price at fair market value.

A four-year vest with a one-year cliff is common. Check that the good leaver wording covers resignation for good reason, such as a change of role.

Investor protections to review before signing

Consent matters usually cover new share issues, changes to the articles, borrowing above a threshold and appointing directors, and each one is a veto. Information rights give investors accounts and board papers, so a monthly duty is workable.

Warranties cover capacity, IP ownership and undisclosed liabilities. Investment agreements carry business warranties, so run due diligence before you give them.

After the round: director duties, registers and filings

The round changes the share capital, so the statutory records must follow. Directors are responsible for their accuracy.

Update the register of members and, if a change requires it, the company’s own PSC register. UK companies are not generally required to keep a local statutory register of directors.
File form SH01 with Companies House within one month of the allotment.
If PSC information changes, update the company’s PSC register within 14 days of confirming the change. Then notify Companies House within 14 days of updating the register, using PSC01 for an individual PSC or PSC02 for a relevant legal entity.
Deliver the confirmation statement within 14 days of the review period end.
Apply to HMRC using form SEIS1 or EIS1 after the shares are issued; these are scheme forms, not Companies House filings.

Post-round records and filings

Update register of members
Update register of directors
Update register of people with significant control
File PSC information at Companies House
File confirmation statement reflecting new share capital
File annual accounts

Companies House is the registrar. Its guidance on people with significant control explains who counts as a controller; updating the company’s own PSC register and notifying Companies House are separate steps.

Common questions

Do SEIS and EIS shares need a set issue order?

The two schemes can be used together. A term sheet that uses both should state the number and class of each, because the limits apply separately.

What if the term sheet changes after advance assurance?

Report the change to HMRC before completion. A new share class or a different use of funds can affect the opinion.

Can a bad leaver clause endanger relief?

It can if it forces a transfer within the three-year holding period at a pre-arranged price. Keep leaver pricing at fair market value.

Who files the compliance statement?

The company files form SEIS1 or EIS1 after the shares are issued. Investors cannot claim relief until HMRC processes it.