Raising capital under the UK’s SEIS and EIS schemes is often the first major funding milestone for high-growth startups. These early angel rounds provide critical seed capital, validate the business idea and allow founders to build initial traction. However, when a company later seeks institutional venture capital investment, typically as a Series A or first institutional round, founders often discover that decisions made during their SEIS/EIS fundraising often come under intense scrutiny.

From Angels to Venture Capital: Key Legal Issues for UK Startups Raising Institutional Investment After SEIS/EIS Rounds

Callum Ritchie January 7, 2026

Raising capital under the UK’s SEIS and EIS schemes is often the first major funding milestone for high-growth startups. These early angel rounds provide critical seed capital, validate the business idea and allow founders to build initial traction. However, when a company later seeks institutional venture capital investment, typically as a Series A or first institutional round, founders often discover that decisions made during their SEIS/EIS fundraising often come under intense scrutiny.

Institutional VC investors apply a very different lens from angel investors. They expect robust governance, clean corporate structures and investment documentation that can support scale, follow-on funding and an eventual exit. As a result, SEIS/EIS legacy and angel investment issues are frequently one of the biggest sources of delay, renegotiation and risk in institutional fundraising.

This article explores the key legal issues UK founders must address when moving from SEIS/EIS angel funding to their first institutional VC round, and how early preparation can significantly improve outcomes.

Understanding the Shift from SEIS/EIS Angel Investment to Institutional Venture Capital

Angel Funding and SEIS/EIS: Early-Stage Simplicity

SEIS and EIS funding rounds are often driven by speed, relationships and tax efficiency. Angels often invest on the basis of belief in the founders and the idea, with documentation that is relatively light-touch and heavily influenced by tax requirements rather than commercial investor protections.

Common characteristics include:

Standardised SEIS/EIS subscription agreements
Ordinary shares only
Broad founder discretion
Informal governance arrangements
Limited ongoing reporting obligations

This simplicity is often entirely appropriate at an early stage.

Institutional VC Investment: A Different Legal and Commercial Standard

Institutional VC investment is very different. Venture capital funds are accountable to their own investors and operate within defined mandates. Their investment committees require certainty, downside protection and a governance framework that allows them to manage risk effectively.

As a result, VCs expect:

Institutional-grade articles of association
Detailed shareholders’ agreements
Preferred share structures
Defined investor control rights
Clear exit mechanics

The transition between these two models is rarely seamless without deliberate legal restructuring.

How SEIS/EIS Documentation Impacts Your First Institutional VC Round

One of the most common surprises for founders is how much attention VCs pay to historic SEIS/EIS documents.

Are Your SEIS/EIS Documents “VC Ready”?

Many startups raise their SEIS or EIS funding using standardised templates designed primarily to ensure tax relief eligibility. While these documents are often entirely appropriate at the time, they may not anticipate the needs of future institutional investors. Problems frequently arise where:

Shareholder agreements cannot be easily replaced
Articles do not permit multiple share classes
Angel consent rights are too widely dispersed
Side letters create inconsistent rights

VCs will almost always require a full document reset, but that reset depends on shareholder approvals.

If early documents were not drafted with this in mind, founders may face difficult conversations at exactly the wrong moment.

Angel Investor Rights That Commonly Concern VC Funds

Legacy Rights That Can Block or Delay VC Investment

SEIS/EIS investors may hold rights that are commercially reasonable at seed stage but problematic later on, including:

Veto rights over share issuances
Broad reserved matters
Individual investor consent thresholds
Anti-dilution protections
Board appointment or observer rights

While none of these are inherently problematic, issues arise where they conflict with the rights a VC expects to receive or where too many individual investors hold blocking rights.

From a VC’s perspective, a cap table with dozens of angel investors all holding consent rights can be unworkable. Founders should therefore expect pressure to simplify governance and centralise decision-making.

Rationalising Angel Rights Without Alienating Supporters

SEIS/EIS investors often feel a strong emotional connection to the business. Many will have backed the company before it had traction, revenue or institutional credibility. Understandably, they may be resistant to seeing their rights diluted or removed.

Founders need to handle this transition carefully. Transparency is critical. Founders should be prepared to explain:

Why institutional investors require simplified governance
How angel economic interests remain aligned
That restructuring is a normal part of scaling

In many cases, angels are ultimately supportive once the commercial rationale is explained, particularly if they understand that institutional capital increases the likelihood of a successful exit.

SEIS and EIS Compliance Under Institutional Scrutiny

Why SEIS/EIS Tax Relief Still Matters

Although SEIS/EIS tax relief is claimed by investors, companies have ongoing obligations not to breach qualifying conditions during the relevant period.

VCs will often flag risks such as:

Preference structures creating capital protection
Redemption or guaranteed return features
Excessive investor control

If a company inadvertently causes SEIS/EIS relief to be withdrawn, early investors may face unexpected tax liabilities, damaging founder-investor relationships.

Structuring VC Terms Around SEIS/EIS Constraints

Experienced advisers can often structure VC protections in a way that:

Preserves commercial outcomes
Avoids breaching SEIS/EIS rules
Protects the company’s reputation

Ignoring this issue entirely can lead to late-stage renegotiation or reputational fallout.

Legal Due Diligence: SEIS/EIS Rounds Under the Microscope

Why VC Due Diligence Is More Intensive

Institutional VC due diligence is designed to uncover legal, structural and compliance risks. SEIS/EIS rounds are often examined in detail, even where they occurred years earlier.

Common diligence issues include:

Missing share certificates
Incorrect or incomplete statutory registers
Unauthorised share issuances
Missing board or shareholder resolutions
Poorly documented IP assignments

These issues rarely kill deals outright but can materially delay completion and complicate a VC round.

A pre-emptive legal audit before approaching VCs can allow you to fix issues proactively and avoid rushed solutions.

Capital Structure Evolution: Ordinary Shares to Preferred Shares

Introducing Preferred Shares at Institutional Stage

SEIS/EIS investors almost always hold ordinary shares. Institutional VCs typically invest via preferred shares with enhanced economic and control rights.

These rights often include:

Liquidation preferences
Anti-dilution protection
Enhanced voting rights
Priority returns on exit

Founders must understand how these rights affect real-world outcomes, particularly in modest exit scenarios.

Impact on Founders and Early Investors

Liquidation preferences can materially alter exit economics. In some scenarios, founders and angels may receive little or nothing until VC preferences are satisfied.

Clear modelling and explanation at the time of investment helps avoid misunderstandings later.

The Risk of Giving Away Too Much Equity Too Early

One of the most common and costly issues encountered when UK startups move from SEIS/EIS funding to institutional venture capital is excessive early-stage dilution. In the rush to secure seed funding, founders sometimes give away a disproportionate amount of equity to angel investors, advisers or early hires, without fully appreciating how this will be viewed by institutional investors later on.

From a VC’s perspective, founder equity is not just about fairness, it is about alignment and incentives. If founders are already heavily diluted before a Series A or first institutional round, investors may question whether the management team remains sufficiently motivated to scale the business over the long term.

Institutional investors will typically expect founders to retain a meaningful equity stake post-investment. Where this is not the case, VCs may seek to address the imbalance through mechanisms such as:

Founder re-vesting or “top-up” equity arrangements
Increased option pools created before the VC investment (further diluting founders)
More aggressive control and veto rights
Reduced valuations to compensate for perceived risk

Each of these outcomes can materially worsen the founder’s position.

How Early SEIS/EIS Dilution Affects Institutional VC Appetite

While SEIS and EIS are designed to encourage early investment, they do not regulate how much equity a company gives away. As a result, it is not uncommon to see startups that have already allocated 30–50% of their share capital before raising institutional funding.

This can create several problems when raising venture capital:

Founder ownership falls below market expectations, raising incentive concerns
Cap tables become crowded, with many small shareholders
Future funding rounds become harder, as there is less equity available for follow-on investors
Exit outcomes become less attractive for founders, particularly where VC liquidation preferences apply

VCs will often scrutinise the cap table as closely as the technology or traction. A messy or over-diluted structure can result in slower fundraising or tougher terms.

Founder Dilution, Vesting and Control in Institutional VC Rounds

How Founder Positions Change Post-VC Investment

Institutional investors expect founders to remain incentivised and committed. As a result, VC rounds often include:

Founder vesting or re-vesting arrangements
Good leaver / bad leaver provisions
Increased option pools
Restrictions on share transfers

These terms can feel personal, but they are largely about risk management from the investor’s perspective.

Excessive early dilution also increases the likelihood that founders will be asked to accept re-vesting arrangements as part of the institutional round. While vesting is common in venture capital transactions, it is often more aggressively applied where investors believe founders have already “cashed out” too much equity relative to the company’s stage.

Negotiating Founder-Friendly Outcomes

Founders should assess these provisions holistically, considering:

Long-term incentives
Alignment with growth objectives
Market norms for comparable deals

Legal advice is critical at this stage to avoid unintended consequences.

Governance Reset: Boards, Reserved Matters and Reporting Obligations

Institutional Governance Expectations

VC investors expect governance structures that support scale and accountability, including:

A reconstituted board with investor representation
Clearly defined reserved matters requiring investor consent
Regular financial and operational reporting
Information rights aligned with fund requirements

While this can feel restrictive, it often strengthens decision-making and credibility.

For founders accustomed to informal decision-making, this can feel restrictive. However, effective governance often becomes a strength as the company scales and prepares for future rounds or exit discussions.

Preparing for Follow-On Funding and Exit from Day One

One of the most important mindset shifts founders must make is recognising that the first VC round is rarely the last.

Terms agreed at this stage will influence:

The attractiveness of the company to follow-on investors
The ease of future fundraising
Exit negotiations and outcomes

Overly aggressive investor protections or poorly thought-through structures can deter later investors or require painful renegotiation. Founders should therefore aim for terms that are robust but balanced, even if that means pushing back on certain requests.

Practical Steps UK Founders Should Take Before Raising Institutional VC

To maximise success when moving from SEIS/EIS funding to institutional VC, founders should:

Review all historic SEIS/EIS documentation
Clean up corporate records and filings
Map shareholder rights and consent thresholds
Engage with key angels early
Obtain specialist venture capital legal advice

Conclusion: Turning SEIS/EIS Foundations into Institutional-Ready Structures

The transition from SEIS/EIS angel funding to institutional venture capital is one of the most significant legal and strategic shifts a UK startup will make. While early funding decisions are often made under pressure, their consequences become most visible when professional investors enter the cap table.

Founders who understand the legal implications of their SEIS/EIS rounds (and who take proactive steps to address legacy issues) are far more likely to raise institutional investment efficiently, on favourable terms and without damaging relationships with early supporters.

At The Jonathan Lea Network, we regularly advise UK founders on SEIS/EIS investments, Series A rounds and institutional venture capital transactions. If you are preparing for your first VC round or would like a legal health check before approaching investors, our team would be happy to support you.

We usually offer a no-cost, no-obligation 20-minute introductory call as a starting point or, in some cases, if you would just like some initial advice and guidance, we will instead offer a one-hour fixed fee appointment (charged from £250 plus VAT depending on the complexity of the issues and seniority of the fee earner).

Please email wewillhelp@jonathanlea.net providing us with any relevant information or call us on 01444 708640. After this call, we can then email you a scope of work, fee estimate (or fixed fee quote if possible), and confirmation of any other points or information mentioned on the call.

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This article is intended for general information only, applies to the law at the time of publication, is not specific to the facts of your case and is not intended to be a replacement for legal advice. It is recommended that specific professional advice is sought before relying on any of the information given. © Jonathan Lea Limited.