EIS (Enterprise Investment Scheme)

The relief. Income tax relief of 30% on up to £1m a year, rising to £2m provided anything above £1m goes into knowledge-intensive companies, and carry-back to the previous year is allowed. No capital gains tax on the shares after three years. Deferral relief: a gain on any asset reinvested in EIS shares is deferred until the EIS shares are sold, which is what makes the scheme attractive to someone who has just sold a business. Loss relief against income if the company fails.

The company. Gross assets of no more than £15m before the issue and £16m after, fewer than 250 full-time employees (500 for knowledge-intensive companies), a UK permanent establishment and a qualifying trade. It must generally receive its first EIS or VCT investment within seven years of its first commercial sale (ten for knowledge-intensive companies), may raise £5m a year under EIS and VCT combined (£10m for knowledge-intensive), and £12m over its life (£20m). The money must be at genuine risk and used to grow the business, which is the "risk-to-capital" condition introduced to stop capital-preservation schemes dressing up as venture.

The shares. Full-risk ordinary shares with no preferential rights on a winding up; limited preferential dividend rights are permitted. The investor must not be connected to the company, meaning no more than 30% of the shares and not an employee, though becoming a paid director after the investment is allowed under the business angel rules. Hold for three years or the relief is withdrawn.

What it does to a round. A typical UK seed or Series A has EIS-eligible angels holding ordinary shares beside a fund holding preferred shares with a 1x preference, or, at many UK seed funds, the whole round in ordinaries because the fund itself is EIS-backed. The interaction between the preferred and the ordinaries at exit is then a live question, and the exit waterfall at /labs/equity-instruments is the way to see it.