Raising Venture Capital After SEIS, EIS or Angel Funding: A Legal Guide for UK Founders

This article explains what UK founders need to know when raising venture capital after SEIS, EIS or angel funding. It covers how a VC round can affect existing investors and SEIS/EIS considerations, what investors will examine during due diligence, the key legal documents required, and the terms founders should consider when negotiating valuation, dilution, control and investor rights.

Moving From SEIS, EIS or Angel Investment to Venture Capital

Raising venture capital after SEIS, EIS or angel funding can be an important milestone for a UK startup, but it is rarely just another investment round on similar terms. A VC round usually brings more detailed due diligence, greater scrutiny of previous funding rounds and more complex negotiations around control, dilution and future exits.

Can you raise venture capital after SEIS, EIS or angel investment?

Yes, a UK company can usually raise venture capital after SEIS, EIS or angel investment, provided the company remains eligible for the relevant tax reliefs and the new round is structured correctly. Previous SEIS/EIS funding does not prevent a later VC round, but founders should check how the new investment interacts with existing shareholder rights, SEIS/EIS conditions and earlier investment documents.

SEIS and EIS are tax-advantaged schemes designed to encourage investment into early-stage and growth companies. Because investors may receive valuable tax reliefs, including income tax relief, capital gains tax advantages and loss relief, any risk to those reliefs is likely to concern both existing investors and future VC investors reviewing the company.

Some of the key SEIS/EIS limits and conditions founders should be aware of are:

• SEIS lifetime limit: a company can currently raise up to £250,000 in total under SEIS.
• SEIS employee limit: the company and its subsidiaries must generally have fewer than 25 full-time equivalent employees when the shares are issued.
• SEIS trading period: an existing qualifying trade must generally not have been carried on for more than three years.
• Order of funding: SEIS must come before EIS. A company that has already received EIS or VCT investment cannot subsequently use SEIS, although it can raise EIS and later VC investment after a SEIS round.
• EIS limits: for most companies, EIS investments made on or after 6 April 2026 are subject to an annual risk-finance investment limit of £10 million and a lifetime limit of £24 million. Knowledge-intensive companies can generally raise up to £20 million in a 12-month period and £40 million over their lifetime.

SEIS/EIS compliance also continues after the shares are issued. The company must observe relevant scheme requirements for at least three years and, in some circumstances, the qualifying period is determined by reference to when the relevant trade commenced. SEIS money must also be used for qualifying business activities within three years of the share issue.

A breach may result in tax relief being withheld or withdrawn, which can create commercial tension, reputational damage and potential investor disputes.

HMRC also applies a “risk to capital” condition. Broadly:

• the company must intend to grow and develop its trade over the long term; and
• the investment must expose the investor to a genuine risk of losing capital.

Arrangements designed to protect an investor from normal commercial risk, guarantee an exit or give the investor inappropriate priority can jeopardise relief.

A VC round also tends to involve more formal due diligence than an angel round. Angel investors may have accepted lighter documentation based on trust, tax relief and early conviction, while VC funds usually need to satisfy investment committees, fund requirements and reporting obligations.

This can expose gaps in earlier documentation, including:

• missing shareholder consents;
• inconsistent Companies House filings;
• unclear option promises;
• unsigned IP assignments; and
• incomplete SEIS/EIS paperwork.

What will VC investors check before investing?

VC investors normally carry out legal due diligence before completing an investment. The scope depends on the size of the round, sector, investor risk appetite and maturity of the business, but the aim is broadly the same: to confirm that the company owns its key assets, has issued shares correctly, can trade lawfully and has no undisclosed liabilities.

VC investors will check both HMRC’s SEIS/EIS requirements, which are mandatory where the tax reliefs are relied upon, and the company’s commercial arrangements and proposed VC terms, many of which are negotiable.

Issues identified in due diligence may result in completion conditions, indemnities, valuation adjustments, delays or changes to the investment documents, so founders should prepare early.

Cap table and share history

Investors will review the company’s share capital, shareholder register, articles of association, previous share issues and transfers, option grants, convertible loan notes, advance subscription agreements and shareholder consents. They will want to understand who owns what, what rights attach to each share class and whether existing rights could block or complicate the VC round.

This is particularly important after SEIS/EIS or angel funding, where late filings, inconsistent valuations, undocumented option promises or a cap table that does not match the statutory registers can delay completion.

SEIS/EIS documentation

Where a company has raised SEIS/EIS investment, investors will usually ask for advance assurance correspondence, compliance statements and certificates, subscription documents, board minutes, investor certificates and evidence of how funds were used.

A company can apply to HMRC for advance assurance before issuing shares. After a qualifying issue, the company must submit the relevant compliance statement, such as form SEIS1 or EIS1, before HMRC authorises the company to issue SEIS3 or EIS3 compliance certificates to investors so that they can claim relief.

Investors may also ask whether any shareholder is “connected” with the company. The rules are detailed. Among other restrictions, an investor and their associates can generally become connected where they control more than 30% of relevant share capital, voting power or rights to assets. Under SEIS, employees and their associates are generally excluded, although an individual is not treated as an employee merely because they are a director. EIS contains separate rules for directors, including limited exceptions for qualifying business angels.

SEIS/EIS shares must also satisfy specific share requirements. They must broadly be ordinary, full-risk shares and must not carry preferential rights to the company’s assets on a winding up or rights designed to protect the investor from normal investment risk. Although limited preferential rights can be permitted in certain circumstances when structured correctly, founders should not assume that rights commonly negotiated by VC investors can simply be attached to SEIS/EIS shares.

If a VC round involves liquidation preferences, anti-dilution protection or other special investor protections, the company should check carefully how the new rights interact with existing SEIS/EIS shares.

Intellectual property ownership

For many startups, intellectual property is a core asset. VC investors will want evidence that the company owns or has properly licensed the software, brand, designs, data, inventions, content or technology it relies on.

A common issue is that founders, freelancers, agencies or early developers created IP before formal assignments were signed. In England and Wales, paying for work does not always mean the company owns all relevant IP, so written assignments may be needed.

Commercial contracts and customer risk

Investors will usually review material customer and supplier contracts, reseller arrangements, platform terms, data processing agreements and unusual revenue arrangements. They will want to understand whether revenue is repeatable, whether key contracts can be terminated easily and whether the company has accepted uncapped liability or onerous obligations.

For SaaS, technology, marketplace, fintech, healthtech and data-led companies, customer terms and privacy documents can be especially important. Weak contracts may not stop an investment, but they can raise concerns about scalability, risk management and future enterprise sales.

Employment, consultants and founder arrangements

VC investors often review founder service agreements, employment contracts, consultant agreements, option schemes, restrictive covenants and confidentiality protections. They will want comfort that key people are tied into the business and that appropriate arrangements apply if a founder, employee or consultant leaves.

Founder vesting is often negotiated in VC rounds. This can make a founder’s shares or economic interest subject to leaver provisions over time, even where the founder already holds shares.

Regulatory and compliance issues

Some companies face sector-specific scrutiny, particularly those in financial services, healthcare, data analytics, consumer platforms, regulated products, cryptoassets, payments and insurance.

Investors may not expect every issue to be fully resolved, but they will expect a credible explanation of the company’s regulatory position, including what advice has been taken, what permissions or exemptions apply and what compliance steps are planned.

Timing and preparation

The timing of a VC round depends on the investor’s process, due diligence, negotiation, company readiness and complexity of the deal. A straightforward round may complete within several weeks after a term sheet is agreed, while more complex rounds can take longer.

A well-organised data room, updated statutory registers, a clear cap table, signed IP documents and current employment and consultant contracts can reduce delays.

What documents are needed for a VC funding round?

A VC round usually involves more detailed documentation than most angel or SEIS/EIS rounds. The term sheet sets out the main commercial and legal terms, including valuation, liquidation preference, anti-dilution protection, investor consent rights, board rights, founder vesting, warranties and completion conditions.

The investment agreement is the main subscription document and usually includes completion conditions, warranties, investor rights and founder obligations. Founders should review warranties carefully and make appropriate disclosures.

The articles of association are often amended or replaced to create a new share class and set out voting, transfer, pre-emption, drag-along, tag-along and liquidation rights. A shareholders’ agreement may also cover board composition, reserved matters, information rights, confidentiality and dispute mechanics.

A disclosure letter records exceptions or relevant facts disclosed against the warranties. Those disclosures qualify the warranties and, where a matter has been properly disclosed in accordance with the agreed disclosure standard, it will generally prevent the investor from bringing a warranty claim based on that disclosed matter.

The round may also involve board minutes, shareholder resolutions, Companies House filings, option documents, IP assignments, employment agreements, director appointments and updated statutory registers.

What happens to existing SEIS/EIS and angel investors?

Existing investors are usually affected because new shares dilute their percentage ownership. This is normal in startup fundraising, but the company must still comply with rights in its existing articles, shareholders’ agreement and investment documents.

Those rights may include pre-emption rights, consent rights, information rights or reserved matters. Issuing new shares, creating a new share class, changing the articles, taking on debt or appointing directors may therefore require investor approval.

SEIS/EIS investors may also want comfort that the VC round will not put their tax relief at risk. The answer depends on the timing of the round, the company’s activities, rights attaching to the shares and whether value is returned to investors.

HMRC’s “value received” rules can apply where an investor receives certain payments, benefits or other value from the company during the relevant period. Transactions such as share buy-backs, repayments or benefits provided to an investor can therefore affect relief, depending on the circumstances. Arrangements providing guaranteed or protected returns may also conflict with the scheme requirements.

Clear communication with early investors can help. Founders should explain why the round is needed, how the money will be used, what consents are required and the proposed timetable.

What VC terms should founders negotiate before signing?

VC funding can bring strategic value, but it can also change the company’s governance, economics and future exit outcomes. The key VC terms that founders should negotiate before signing include:

• Valuation and option pool

Founders often focus on headline valuation, but the option pool can materially affect dilution. If an enlarged option pool is created before completion, the dilution may fall more heavily on founders and existing shareholders.

The key question is what everyone owns after the round on a fully diluted basis, meaning on the assumption that outstanding options, warrants and convertible instruments that can become shares are exercised or converted.

• Board seats and observer rights

A VC investor may ask for the right to appoint a director or board observer. A director has legal duties and voting rights, while an observer usually attends meetings and receives information but does not vote.

• Reserved matters and veto rights

Reserved matters require investor consent before specified actions, such as issuing shares, changing the articles, approving budgets, incurring significant debt or selling key assets. Investors need protection against major decisions, but founders also need enough flexibility to operate.

• Liquidation preference

A liquidation preference determines how proceeds are distributed on a sale, liquidation or similar exit. A VC investor may, for example, receive its investment back before ordinary shareholders receive anything. Founders should model the effect at different exit values.

• Anti-dilution protection

Anti-dilution protection adjusts an investor’s position if the company later raises money at a lower valuation. Weighted-average anti-dilution is generally less severe than full-ratchet protection, so founders should understand the formula rather than treating the clause as standard.

• Founder vesting and leaver provisions

Founder vesting means some of a founder’s shares may be subject to forfeiture, transfer or economic adjustment if the founder leaves within an agreed period. Founders should check the vesting period, trigger events, transfer price and who determines leaver status.

• Warranties and founder liability

Founders may be asked to give warranties about the company’s legal, financial and commercial position. Where founders have personal liability, they should understand the liability cap, time limits, knowledge qualifiers and disclosure process.

What are the risks of getting the VC round wrong?

A VC funding round can unlock growth, but legal mistakes can have long-lasting consequences. Some of the risks of getting the VC round wrong include:

• Loss or clawback of SEIS/EIS relief

If the company breaches SEIS/EIS rules, investors may lose tax relief or face clawback. Particular care is needed where the transaction involves share buybacks, preferential rights, investor exits, connected parties, non-qualifying activities or arrangements reducing investors’ genuine exposure to risk.

• Completion delays and loss of momentum

Legal issues discovered late can delay completion. Delay can be risky because investor appetite, valuation and company runway may change, and an investor may gain leverage to renegotiate terms.

• Founder dilution, control and future fundraising

Dilution is part of raising external capital, but founders should understand both percentage dilution and rights dilution. Founders may retain a meaningful shareholding while losing practical flexibility because investor consent is required for key decisions.

Future investors will also review the existing articles, investor rights, preference stack, option pool, consent regime and cap table. If earlier terms are too complex or investor-heavy, amendments may be needed before another raise can proceed.

How JLN can help with VC funding after SEIS, EIS or angel investment

The Jonathan Lea Network advises startups, scaleups, founders and investors on fundraising transactions, including SEIS and EIS rounds, angel investment, advance subscription agreements, convertible loan notes and venture capital investment. We can help you understand the legal and commercial implications of a proposed VC round, prepare for investor due diligence, identify issues that may affect existing SEIS/EIS investors, and review or negotiate the key investment terms before you sign.

Our work can include reviewing your cap table, share history, constitutional documents, investor consents, option arrangements, IP ownership, founder arrangements, commercial contracts and employment documents. We can also draft, review and negotiate the main transaction documents, including term sheets, investment agreements, articles of association, shareholders’ agreements, disclosure letters, board minutes, shareholder resolutions and completion documents.

Where specialist tax input is needed, we can work alongside tax advisers to ensure the legal documents align with the intended SEIS, EIS and wider tax position. Our aim is to help founders approach the VC round with a clear legal strategy, reduce avoidable delays, protect the company’s position and complete the investment on terms that support future growth.

Contact Us

We will respond to most enquiries with both an indicative scope of work and fee estimate, as well as the offer of a complimentary 20-minute discovery video call to discuss your issues and how we can help, before sending a more considered formal fee estimate via email.

In some limited cases, if you would just like initial advice and guidance on a call, we may instead offer a fixed fee appointment (commonly charged between £280 to £500 + VAT) whereby we will review the information you provide, hold a video call consultation and then follow up with an advisory email (as well as a fee estimate for any further work identified).

Please email wewillhelp@jonathanlea.net or call us on 01444 708640 as a first step. We first need an overview of the background and your issues, together with any significant documents, to provide an indicative scope of work and fee estimate.

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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.