UK Venture Capital and Angel Equity Investment Legal Terms

Venture Capital and SEIS and EIS Angel Equity Investment Legal Terms

What Does This Guide Cover?

This guide sets out, in plain English, what some of the terms relating to equity funding mean. We will try to add to it over time and any suggestions would be most welcome. 

Anti-Dilution Provisions

A right which requires an investee company to issue shares to an investor for a nominal sum, in the event that the investee company issues shares to a new investor on a funding round, where the price per share is less than that paid by the investor benefiting from the anti-dilution right. The provisions will state that, the lower the price the new shares are issued at, the greater the number of shares which will need to be issued to the investor.



The articles of association of a company. This, together with any shareholders agreement, is the constitution of the company and sets out the agreement between the shareholders as to what rights each of the shares will have.

Some provisions that might otherwise be contained in a shareholders agreement are included in the articles, principally for the reason that the articles can more easily be changed in the future by passing a special resolution of shareholders holding 75% of the company’s voting shares.

Bad Leaver

A shareholder who leaves employment with the company in circumstances which have been agreed as being “bad”. These typically include voluntary resignation and gross misconduct, as well as a few other defined events. In these circumstances, the articles will generally provide that the bad leaver must sell their shares for either their nominal value, a percentage of their fair value (as determined by the company’s accountant) or their original subscription price.

Come Along Right

A right, typically set out in the articles and held by a venture capital fund, which requires any one party selling a percentage of their shares (which is less than the percentage at which a drag along right or a tag along right would apply) to a third party, to have that third party buy the same percentage of shares from the venture capital fund.

Compulsory Transfer Provisions

Provisions in the articles or shareholders agreement which set out when shares must, at the election of the company or a third party, be transferred. Typically, when an individual is a good leaver or a bad leaver, also in the event of death, insolvency or certain behaviour on the part of a shareholder like a breach of the shareholders agreement or any service contract.

Conditions Precedent

Tasks detailed in a subscription agreement that must be completed before an investment can complete.

Conditions Subsequent

Tasks which must be completed within a certain period of time after completion of an investment.

Convertible Loan Notes

Loan notes which are convertible into shares. This conversion, in venture capital or early stage funding, will normally be at a specific point in time and at a specific price. Note that investments in the form of loans that convert into shares do not qualify for the SEIS and EIS tax reliefs.


A written instrument issued by a company acknowledging a debt and constituting a charge over the company and its assets which is registered at Companies House. Typically a debenture creates a fixed charge over the assets of the company and a floating charge over the rest of the company’s undertaking. It grants the creditor rights as mortgagee or chargee such as the authority to appoint an administrator with wide powers to run the company’s business and realise its assets.


A statement which qualifies a warranty. Such statements will typically be included in a disclosure letter that sets out information that is inconsistent with the warranties that are listed in a subscription agreement.

For instance, if a warranty is contained within a subscription agreement states that the company is not being sued and that is untrue, then the disclosure letter will provide details of the litigation in order for the warrantor to avoid being otherwise sued for breach of warranty.

Down round 

A round of equity financing in which the valuation of the company is less than in the previous round of funding.

Downround Right

See Anti-Dilution Provisions above.

Drag Along Rights

A right for shareholders who own more than a set percentage of the shares in a company (usually more than 75% in nominal value) to require all other shareholders to sell their shares to a third party at the same valuation as has been agreed with the majority shareholder(s) (i.e. the other shareholders are dragged into selling their shares). The effect of this clause commonly allows a founder to sell the company when a dissenting minority shareholder might not otherwise agree to sell their shares, thus allowing a buyer to acquire the entire issued share capital.


The Enterprise Investment Scheme. Introduced in 1994 by the government to encourage investment into small, higher risk businesses. The income tax liability of the investor is reduced by 30% of the sums invested. The investor will also receive full exemption from capital gains tax on any sale of shares issued under EIS. There are detailed rules and strict criteria that apply to the granting of EIS relief. The annual investment limit from tax year 2012-13 is £1 million.

For shares issued on or after 18 November 2015, the issuing company must not raise more than £12 million (£20 million if it is a knowledge-intensive company) in total in relevant investments (that is, under the EIS, VCT, SEIS, SITR and any other scheme that qualifies as risk capital in accordance with the European Commission’s Guidelines on State aid to promote risk finance investment).

Like SEIS, relief is also available for investments made through a bare trustee or nominee (or an EIS investment fund) but not for investments made through partnerships.


The ‘compliance statement’ form to be filed with HMRC following the issue of shares subject to EIS. Formal approval is then given by HMRC authorising the company (on form EIS 2) to issue compliance certificates to each UK tax resident investor, known as EIS 3. The EIS 1 form can’t be submitted until after the issue of shares, or four months after the issuing company has started to trade or the research and development for which the funds were raised has been carried on. If the issuing company has been trading for four months when it issues the shares, it does not need to wait another four months before submitting form EIS 1.


The certificate supplied by HMRC to a company that has issued shares under EIS. This certificate is filled in by the company and then sent to the investors so that they can claim the tax reliefs in their self-assessment tax returns.

EMI Scheme

The Enterprise Management Incentive (EMI) Scheme. An HMRC approved scheme under which tax advantaged share options are granted to employees. Subject to certain criteria, options valued up to £250,000 can be issued to an employee with no tax consequences on the grant of the share options or subsequent exercise of the share options (such exercise usually being immediately before an exit event, although exercise can also be at the end of a performance or vesting period).

EMI options may be granted under a set of plan rules, or by way of stand-alone EMI option agreements. EMI options can be satisfied by newly issued shares or by the transfer of existing shares from a shareholder.

Note that there is no income tax liability on exercise as long as the exercise price was at least equal to the market value of the shares at grant. If the exercise price was less than the market value of the shares at grant, then income tax is due on the difference between the exercise price and the market value at grant. On a sale of the option shares, capital gains tax may be payable on any gain over the market value at grant. Shares acquired on the exercise of EMI options qualify for entrepreneurs’ relief (reducing capital gains tax to 10%), provided conditions are met, with the holding period of the option counting towards the 12 month holding period for the shares required for the relief to apply.

In order for an EMI option to qualify for favourable tax treatment, the grant of the option must be notified to HMRC within 92 days of the grant date.

Exercise Price

See Strike Price below.

Fully Diluted Shareholding

The percentage shareholding a shareholder has following the exercise of all rights to acquire shares in the company. This is most often used to describe a percentage holding that an individual would have following the exercise of all share options, including any options not yet granted but which the company have committed to by way of an option pool contractual obligation. Often investors are provided with an additional ‘fully diluted’ share capital table.

Good Leaver

A shareholder who leaves the employment of a company in circumstances agreed as being “good”. These typically include death, ill health or some other event out of the shareholder’s control, as well as when shares are considered to be fully vested if any such vesting provisions are in effect. In these circumstances, the articles or shareholders agreement will generally provide that the good leaver must sell their shares for market value (or a defined discounted market value).

Heads of Terms

Often referred to by its US equivalent ‘term sheet’ (or ‘letter of intent’), a set of outline terms for an investment which are not legally binding (other than confidentiality and exclusivity obligations). They will be signed by both the investors and the investee company and will be followed by the formal investment documentation. Heads of terms can be just a page or two, while they tend to be more detailed for larger investment rounds.


A contractual undertaking to make a payment to an investor to meet a specific potential legal liability that may arise. An indemnity entitles the person indemnified to a payment that reimburses them if the event giving rise to the indemnity takes place. For instance, an investor may demand an indemnity from an investee company if he is concerned about the outcome of a piece of litigation which is ongoing at the time of the investment.

Information Memorandum / IM

A document detailing the investment proposition offered by an investee company in respect of a private placement of shares, containing marketing and financial information to induce investors, but also important legal information about the offer, including detail about the legal process and framework, as well as disclaimers and limitations on liability.

The information memorandum often contains a subscription agreement, self certification (as a sophisticated investor etc) and application forms that investors complete if they want to commit to the fundraising and subscribe for shares.

Letter of Intent

See Heads of Terms.

Limitation on Warranty Claims

A series of limits which apply to any claim under the warranties given in a subscription agreement. They will typically provide a time period in which the claims can be made (after which no claim will be available), as well as a threshold that the claim must be above before it can be made. The time period is usually one year or two years following completion for non-tax warranties and the threshold is usually limited to the completion monies raised for the company, while if founders are also warrantors the cap might be set to the amount of what their annual salary is.


The winding up of a company. In the event that the preferred ordinary shares have been issued, the proceeds of any winding up will be distributed in accordance with the liquidation preference waterfall.

Liquidation Preference Waterfall 

A provision in the articles which sets out the priority for payments to shareholders (if any) in the event that the company is liquidated. Holders of preferred ordinary shares will be paid the amount of their investment or a proportion of it (subject to any preference multiple) before the holders of ordinary shares.

Holders of preferred ordinary shares may also have agreed an order of priority amongst themselves (for instance, holders of B preferred ordinary shares, having provided new money, will be paid out before holders of A preferred ordinary shares). A participating preference may apply here. It is also often agreed contractually that a liquidation preference waterfall would apply to a sale or a listing (which would not automatically be the case if no winding up occurred).

Liquidation preference clauses can also apply to exit/sale events and those seeking to benefit from the EIS tax reliefs should be wary as the preference provision may invalidate EIS.

Loan Notes

A written instrument evidencing a debt due by a company to an investor or any other person that lends the company money. These instruments are issued in the same way that shares are issued and can be issued on a variety of different terms. Typically, early stage companies borrow money at a low interest rate and with a long repayment window. They can also typically issue convertible loan notes.

Loan notes may be secured or unsecured.  The nature of security taken will vary from transaction to transaction.


A mechanism which prevents a shareholder, usually a founder or other key employee, from selling shares for a certain period of time. The underlying purpose of the rule is to ensure that directors and key shareholders show a commitment to the business.

Nominal Value

The basic value of a share, also known as par value, as opposed to its market value which may be more or less than par. This is typically one pound or a fraction of that (which can go down to £0.000001 last time I checked).

Non-Participating Preference

A preference share which, once it has been paid out in a liquidation, does not participate in any further sums to be paid out to shareholders.

No Shop

A provision in the heads of terms which restricts the investee company from seeking funding from other investors until such time as negotiations with the investors who are party to the heads of terms have broken down. The length of time this exclusivity extends to is negotiable, although it should last no longer than two months, while ideally the investor should offer some consideration like a deposit to benefit from such exclusivity.



A person who attends a board meeting of a company but does not speak or vote at that meeting. Some venture capital funds or a syndicate of angel investors will appoint such a board observer instead of a non-executive director in order for the appointee to avoid the duties and potential liabilities of being deemed a statutory director.

From the perspective of the investors, it should be noted that the shareholders agreement and list of matters requiring consent from investors (often a certain percentage of the investors at any particular time) should provide more than adequate influence and control on key company decisions without the investors needing a seat on the board, whether as an executive or non-executive director.

One Year Cliff

In respect of the vesting of shares over time, a provision that states that no shares or (share options) will vest before the first anniversary of the vesting process commencing. Once the one year cliff period has passed, a certain amount of shares (for example 25% of the total entitlement) will vest.

Mainly due to tax considerations note that the shares subject to the vesting arrangement are usually issued upfront (without any anti-dilution rights) on a reverse vesting basis whereby the company’s right to buy back these shares for their nominal value (starting with a right to buy all of them back before the end of the one year cliff) declines over the vesting period.

Option Pool

Often used to refer to the total amount of equity the company commits to being reserved for granting share options to future hires. The option pool is often a contractual commitment set out in the shareholders agreement or referred to in any subscription agreement. The option pool is often included in the pre-money valuation of a company and in the fully-diluted share capital table.

The size of the option pool is typically negotiated at each round of financing. Every company is different, but an option pool in most cases tends to relate to no more than around 10% of the share capital.

Pari Passu

At an equal rate or preference. Pro rata is another phrase often used which has the same meaning. This is used to describe shares which have the same rights in certain circumstances, such as dividends being paid pro rata in proportion to each member’s individual shareholding.

Participating Preference

A preferred ordinary share which, once it has been paid out in a liquidation, will also participate in any amount left over for distribution. The shareholder then further participates, pro rata to their shareholding in the company, in any balance left over once the participating preference has been paid out.

Pay to Play

A provision, often included in a company’s articles of association, designed to encourage the continued support of the company by investors. It operates by penalising existing investors who fail to purchase a specified percentage of their pro-rata entitlements in subsequent rounds of investment, including down rounds.

The pay to play provision can be drafted in different ways. For example, it may operate to convert preferred shares held by an investor to a separate class of preferred shares which have either no or less favourable anti-dilution protection, voting rights and/or liquidation preference. Sometimes the provision may operate by converting the investor’s shares into ordinary shares, thereby losing all of the advantages of preferred shares.

Permitted Transfers

Provisions in the articles or shareholders agreement which allow shareholders to transfer shares without going through the process associated with pre-emption rights on a share transfer. Permitted transferees will typically be family trusts, spouses, civil partners and children.

Pre-Emption Rights on a Share Issue

A right for existing shareholders to subscribe for shares before any new shares are issued to new shareholders (at the same valuation and otherwise on the same terms as the shares are intended be issued to the new shareholders). That right will normally be pari passu to the shareholders’ ownership of shares. The existing shareholders will normally have a limited period to exercise this right before any shares not taken up can then be issued to the new shareholders wanting to subscribe.

The relevant clause often includes a provision whereby these pre-emption rights can still be dis-applied by a special resolution of shareholders owning 75% of the voting shares.

Pre-Emption Rights on a Share Transfer

A right for existing shareholders to buy shares from any member selling them before any of those shares can be sold to a new shareholder. That right will normally be pro rata to the shareholders’ ownership of shares. There is usually an added right for the company to have the ability to buy back any or all of the shares being sold if they are not taken up by existing shareholders before any shares left at the end of the process can then be sold to a new shareholder. The terms of the offer, including price, should be the same as the new shareholder is prepared to accept for the shares.

Sometimes there is an additional provision whereby the company can dispute the price that the new shareholder is prepared to pay and require that the fair value of the shares is calculated and that the shares are instead acquired by existing shareholders and/or the company at this fair value.

Preference shares

A share which entitles a shareholder to receive a specific amount of money, either as to dividends or capital or both, ranking ahead of all other shareholders. The exact nature of preference shares and the rights attaching to them are set out in the company’s articles.

Preferred Ordinary Shares

Commonly an equity share which entitles the shareholder to receive profits or proceeds of a liquidation in priority to other shareholders.


The price paid for a share on issue to an investor, or any other shareholder, over and above the nominal value. For example, if an investor pays £100 for a share with a nominal value of £1, the investor will have paid a £99 premium.

Pro Rata

In proportion to the shareholders’ interest in the entire issued share capital of a company.


Also known as an equity or performance ratchet, in essence an arrangement where the founder or management shareholders of an investee company can win back some of the equity held by venture capital funds or angel investors. It usually applies when certain profit or performance criteria are met, with the equity held by management rising if the company performs well and falling if it does not.

Often used as an incentive or as a compromise if there is a disagreement as to the value of the shares when an investor invests so as to bridge the gap between management’s optimistic performance forecasts and investor’s more conservative projections.

These ratchets may be structured so that the investor’s equity shares will convert into deferred shares or be redeemed on a formula basis, such that the percentage of the ordinary equity held by management will increase.

Reserved Matters

Certain key decisions, unrelated to the day-to-day management, relating to the operations of the business of an investee company which must be referred to the investors for their consent before the investee company can make those decisions. The matters which are subject to this and whose approval will be required will be the subject of negotiation.

In order to avoid decision making sclerosis it is often agreed that such investor consent is achieved upon the written notification of a certain number, or percentage, of the investors rather than the company being required to contact and receive a response from each and every investor.

Rights Issue

An offer to existing shareholders to subscribe for more shares in a company on a pro rata basis. Similar to, but distinct from, an open offer of shares.

Seed Funding

This typically refers to the first investment, or series of investment rounds, made into a company by individual angel investors. Seed funding precedes a Series A funding.


The Seed Enterprise Investment Scheme. SEIS is very similar to EIS, but offers more generous tax relief to investors and applies to the first £150,000 raised by a company if the shares subscribed for are issued within three years of the date the company starts trading. That condition applies whether the trade was first begun by the company, or whether it was first begun by another person who then transferred it to the company. Note that the company need not have started trading when it issues the shares.

It was introduced by the UK government in 2012 to encourage investment into very early stage and often higher risk businesses. The income tax liability of the investor is reduced by 50% of the sum invested. The investor will also receive full exemption from capital gains tax on any sale of shares issued under SEIS. Strict criteria apply to the granting of SEIS relief. The shares must be held for a period of 3 years, from date of issue, for relief to be retained. If they are disposed of within that 3 year period, or if any of the qualifying conditions cease to be met during that period, relief will be withdrawn.


The ‘compliance statement’ form to be filed with HMRC following the issue of shares subject to SEIS. Formal approval is then given by HMRC authorising the company (on form SEIS 2) to issue compliance certificates to each UK tax resident investor, known as SEIS 3. The SEIS 1 form can’t be submitted until after the issue of shares, or four months after the issuing company has started to trade or the research and development for which the funds were raised has been carried on. If the issuing company has been trading for four months when it issues the shares, it does not need to wait another four months before submitting form EIS 1.

For HMRC to consider that a company has commenced trading it doesn’t have to have sold any products yet.


The certificate supplied by HMRC to a company that has issued shares under SEIS. This certificate is filled in by the company and then sent to the investors so that they can claim the tax reliefs in their self-assessment tax returns (or through the PAYE system if an investor is an employee).

Series A

The first round of investment taken from a venture capital fund (rather than a syndicate of angel investors) by an investee company.

Series B/C/D etc.

Each subsequent institutional funding round taken by an investee company. The share class issued will sometimes match the description of the round (for instance, B preferred ordinary shares will be issued on a Series B funding).

Shareholders’ Agreement

See also SSA.

A shareholders’ agreement on its own deals with the ongoing governance of the company and relationship between the shareholders and together with the articles forms a company’s constitution. The company usually prefers to include several provisions in this agreement as opposed to the articles, because the shareholders agreement is a private document that is not required to be filed at Companies House (where the articles are available to the public). Note that unless you include a provision to the contrary the shareholders agreement can not be amended or varied unless agreement is received from every shareholder.

Share Options

A right to subscribe for a share at a specific price and at a specific point in time. Tax efficient EMI share options are normally issued to employees to allow them to subscribe for shares, usually in the event of an exit when the options can be exercised just before so that the employee can benefit from a share of the capital gain the company makes.


Subscription and Shareholders’ Agreement, sometimes referred to as an ‘investment agreement’. This document is the basis on which an investor will subscribe for shares in a company and how that investment will be managed.

However it is normally preferable to break this document up into a standalone subscription agreement with a separate shareholders’ agreement. Having the subscription agreement and shareholders agreement merged makes things harder to manage for additional investment rounds and investors as you will only really want new shareholders to see the shareholders agreement (and sign a deed of adherence whereby they become a party to it), rather than also the specific contractual terms relating to a previous investment round which will confuse matters. A company will usually want different terms relating to different investors in separate subscription agreements so as to remain confidential, rather than in a subscription and shareholders agreement available and binding on all shareholders.

Strike Price

The price at which a share option can be exercised.

Subscription Agreement

See also SSA. As mentioned before you should also have a separate subscription agreement (incorporating the aforementioned deed of adherence) for each new investor to sign that details clearly the subscription exchange and completion mechanics and forms the actual contract for their specific investment. The subscription agreement will also normally include other provisions like warranties in favour of the investor (with a disclosure letter provided by the company to the extent any of the warranties need qualifying) and self-certification confirmation.

Sweat Equity

Shares earned by employees of a company. Typically the shares will be earned over a period of time subject to a vesting agreement and schedule, usually on a reverse vesting basis to avoid the administrative complications of new shares having to be issued on each vesting event and the attendant tax issues with this approach that can otherwise be avoided.

Tag Along Rights

In the event shareholders holding more than 50% (or other percentage) of the shares in a company have found a third-party buyer for their shares, tag along rights will require those selling shareholders to get the third party to make the same offer to all other shareholders too. Usually included in a company’s articles.


A short form of the IM, pitch deck or business plan designed to quickly spark the interest of potential investors by summarising all the key information relating to the business and offer.

Term Sheet

See Heads of Terms.


A venture capital trust which is a type of fund. It makes investments in accordance with a similar set of rules to the EIS reliefs in order that those individuals who have invested into the venture capital trust can share in the tax relief available. The VCT will be listed on a stock exchange.


The process by which the right to hold shares or exercise a share option increases over time. So, for instance, an employee may be granted share options which will vest on a one year cliff with the balancing number of shares or share options vesting in equal amounts on a monthly basis, or other time period.

Vesting usually works on a reverse basis whereby all the shares are issued at the start and vest on the basis of a repurchase right in favour of the company that decreases over time, often backed up by a power of attorney in favour of the company in case the employee does not co-operate. If for whatever reason the company doesn’t wish to carry out its re-purchase right, the existing shareholders may also have a re-purchase right pro rata their ownership of the company. Depending under what circumstances the shareholder leaves the company the value of their vested and un-vested shares may be calculated at (for example) either market/fair value or nil value.

Veto Rights

See Reserved Matters above.


A series of contractual statements about a company which give the investor comfort as to the operations of the company and a right to sue for damages if they turn out to be incorrect. The primary purpose of the warranties is to force the company to disclose all relevant information against each warranty (that is inconsistent with facts about the company) in a disclosure letter so that the company (and any other warrantors) won’t as result be liable for any breach of warranty and the investors can be sure they know all material facts and possibly re-negotiate their offer as a result of any new information contained in the disclosure letter.


Those people liable for any breach of the warranties, being the company on an investment but often also one or more of the founders (who may like to sign a deed of contribution between them in the event that a claim is made against one of them).


Options to subscribe for a share on a specific circumstance or point in time. Venture capital funds may require these. Angel networks may also require them as part payment for fees due to them. Warrant can be traded independently from the underlying shares so it should be made clear if this is not intended to be the case.

About Jonathan Lea

Jonathan is a specialist business law solicitor who has been practising for over 18 years, starting at the top international City firms before then spending some time at a couple of smaller practices. In 2013 he started working on a self-employed basis as a consultant solicitor, while in 2019 The Jonathan Lea Network became a SRA regulated law firm itself after Jonathan got tired of spending all day referring clients and work to other law firms.

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