How we assisted a technology startup raise over £5m of SEIS, EIS and non-tax advantaged equity funding over two years
The Jonathan Lea Network has assisted a technology startup from incorporation in 2017, through to the present day, as it underwent numerous investment rounds to first develop its products and then in order to help meet increasing customer demand.
The investment rounds involved raising funds from foreign investors and institutions, as well as many UK tax resident individual investors and SEIS/EIS nominee funds who wished to benefit from the SEIS and EIS tax reliefs.
The Jonathan Lea Network assisted with various legal documents throughout this ongoing process, providing the client with our expertise at each fundraising round and thereby enabling them to raise over £5m in two years.
We worked with the client to produce subscription agreements relevant to each investor at every fundraising round, making sure they were compliant with any related tax reliefs in the process.
This included inserting clauses in order to ensure:
completion was flexible and didn’t have to be tied down with every other investor’s subscription; and
a notional day’s gap occurred between the raising of SEIS and EIS monies where the investor was applying for both SEIS and EIS tax reliefs.
We also dealt with any queries the prospective investors had and, if necessary, amended the agreements to take into account any specific terms that were agreed between our client and the investor.
Articles of Association
As our client underwent different funding rounds, they wished to introduce different share classes so that prospective investors could benefit from different rights, in particular an exit priority provision (often also referred to as a ‘liquidation preference’ provision).
In order to make sure that any future investors would benefit from the SEIS and EIS tax reliefs we introduced relevant wording to make sure that any investors requiring the exit priority provision would remain SEIS and EIS compliant upon any issue of shares.
The new share class introduced, termed as A Ordinary shares, was a different class of ordinary shares to the founders. Any investors holding A ordinary shares didn’t get their money back upon an exit event first with the proceeds instead shared between all shareholders, split in favour of each different share class depending on the share valuation. In this instance, the proceeds are split:
in favour of those holding A ordinary shares the lower the share valuation; and
in favour of those holding ordinary shares where the share valuation is higher, once the A ordinary shareholders receive their investment back.
We made sure our client was aware of the SEIS and EIS rules while we were drafting the new articles of association, guiding them throughout the process. We also responded to enquiries from the client’s shareholders regarding the new share class and any potential impact it would have on any investments made pursuant to SEIS or EIS.
With different investors come different requirements. As our client underwent the initial fundraising rounds, the shareholders agreement had to be updated and amended to enable the smooth running of the company, while taking into consideration any specific agreements our client had with significant investors.
Initially this would involve drafting a shareholder agreement to incorporate clauses that would entitle certain investors:
to appoint a director on the company’s board, as long as their shareholding did not dilute below a certain figure;
consent over certain decisions the directors or shareholders wished to take; and
for some investors, appoint a board observer who would be required to attend board meetings, be given notice of meetings, speak at meetings but would not be allowed to vote.
As a number of earlier investors shareholdings began to dilute in the later fundraising rounds, the shareholders agreement required tidying up and removing clauses that became administratively too difficult, or impractical, since the company had developed and the shareholding base increased in size. As the client continued to grow we also inserted clauses that made it easier for the client to issue preference shares, other classes of shares, convertible loan notes and EMI options.
As our client had monthly board meetings board minutes had to be produced for each meeting in order to review the company’s finances, address important matters and make important decisions for the company such as appointing directors or deciding the number of shares to be issued to investors.
In this instance our client produced first drafts of the minutes themselves which we reviewed and amended accordingly.
As companies continue to grow and expand it becomes increasingly important they keep track of important decisions in the form of board minutes or resolutions so that any future investors can easily and readily see when and why each decision was made, therefore building a clearer picture and increasing the likelihood of investment.
We also had to ensure that certain decisions were put towards the shareholders. For decisions taken at various board meetings such as issuing shares and amending the articles, similar resolutions had to be voted upon by the shareholders before filing them at Companies House.
Resolutions that we drafted included:
the subdivision of the client’s share capital to allow for more liquidity and enable the right number of shares to be issued that equate to small percentages of the company’s share capital that investors agreed to subscribe for;
the disapplication of pre-emption rights to allow for shares to be issued to external investors without unnecessary delay (where sometimes the company didn’t want to first offer the new shares to existing shareholders);
authority for the directors to issue the shares; and
the adoption of new articles of association, with the ability for A ordinary shareholders to benefit from the exit priority provision (in line with SEIS and EIS rules).
Due to the large numbers of shareholders involved and with them situated in various locations across the globe, to make the procedure easier and quicker we used an e-signature platform called DocuSign to send out the resolutions and seek the consent of the shareholders. This involved communication with the company secretary and ensuring that we had the most recent and up-to-date email addresses of the shareholders before sending them out. We also sent out a detailed explanatory email and letter explaining the commercial and legal rational for the shareholder resolutions to be passed and also how the shareholders go about signing the agreements through the DocuSign platform.
Compliance Statement Submissions
Once our client had raised each round of investment and we had ensured all the legal paperwork was in good order and the Companies House filings made correctly, we then on our client’s behalf produced and submitted SEIS 1 and EIS 1 compliance statements (in each case together with a detailed covering letter) to HMRC so that HMRC could then reply with the relevant SEIS 3 and EIS 3 certificates which allow for the investors to actually benefit from the associated tax reliefs.
This was an ongoing process and involved cross-checking our client’s updated cap table to make sure we were applying for the tax reliefs on the correct investment amounts. Before and after every investment round we also confirmed with the client exactly how much they can raise pursuant to EIS before hitting their annual limit, enabling them to plan for the next fundraising round.
Detailed arguments had to be made to HMRC when our client first issued A ordinary shares to investors that benefited from the liquidation preference (or ‘exit priority’) provision, that such a provision was compliant with HMRC’s SEIS and EIS rules.
The carefully worded arguments combined with the assiduously produced new articles of association meant that HMRC responded to our submissions (on this occasion submitted alongside the relevant EIS 1 compliance statement) with confirmation that investors holding A ordinary shares didn’t fall foul of the new risk-to-capital condition.
Compliance Statement Certificates
After HMRC approved the relevant compliance statement applications we made, they provided us with SEIS 3 and EIS 3 compliance statement certificates to issue to the investors. We completed the first page of the certificates on behalf of our client before then scanning them and emailing them on to our clients with a detailed advisory letter explaining what they need to do next in order to benefit from the reliefs.
Pre-Emption Offer Letters
In advance of some fundraising rounds we drafted pre-emption offer letters to first send to those investors who already held shares in the company, inviting them to take up the opportunity to invest again before the new shares would be offered to others.
We liaised with the company secretary to ensure that the letters were drafted as persuasively and as precisely as possible and contained all the correct legal details.
To keep on top of legal work which our client may have required, we regularly requested an accurate cap table from the company secretary. As the company secretary regularly updates the company’s cap table we were able to provide information as to what legal work will be required, primarily involving future compliance statement applications and SH01 statement of capital forms to be filed at Companies House.
As a result of the regular updates we were also able to cross-refer between the cap tables we received in the past to the most-recent cap table to spot any irregularities or inconsistencies. Any issues found were quickly raised with the company secretary in order to uncover the reasons why the inconsistencies existed and work out how best to resolve any issues.
We also assisted our client with the advice and documentation involved in setting up an Enterprise Management Incentive Scheme (otherwise known as an EMI Scheme), which allows key company employees to benefit from tax-advantaged share options.
The valuation of the shares was carried out by an EMI specialist accountant we regularly work with (ensuring that the valuation agreed with HMRC was far less than any valuation on the basis of the company’s fundraising activities), while we produced the option scheme contractual documentation, including detailed advisory letters to both the board and the employees to help ensure that all parties are aware of all the main aspects of how the EMI
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