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I’ve been doing quite a lot of work recently for clients who want to get some investment into their companies, and the question of EIS (the Enterprise Investment Scheme) has come up with a couple of people, so I thought I’d share some practical advice with you.
This article is quite a specific how to do things one, so if you’re not interested in getting funding for your business, you’d probably be better off reading something more interesting such as How to spot a gap in the market or Key Success Factors.
If you are thinking about bringing in angel investment, this will be fascinating. Promise.
EIS – what is it, and why is it important?
EIS is a government scheme that is actually useful for small businesses. Now, that it in itself is unusual enough to make it interesting, but enough of the politics.
Imagine you’ve got yourself an angel investor who’s going to give you a nice cheque for 100k so you can employ staff, develop your product, and generally do all the cool marketing things which are going to bring in lots of customers.
EIS means that as soon as the angel investor writes you a cheque, they get a cheque back from the government for 30% of that amount. So you get 100k, and they get 30k immediately. And when you sell the company for a million pounds, the investor doesn’t have to pay any capital gains tax. Brilliant!
Is there a catch?
Of course, there are a few more details to it than this, so the investor has to have actually paid the 30k in income tax that year, as HMRC don’t like to give away money with one hand unless they’ve taken it with the other beforehand. Here’s all the boring bits from HMRC.
Would my business be eligible?
You can get the Revenue to tell you beforehand if you are, by filling out a form (EIS Advance Assurance) but most of the small businesses I help to raise investment could make themselves much more attractive to angel investors by saying that they are eligible for EIS. So that probably means that you could too.
More articles on fundraising and investment
If you’re interested in getting angel investment or other juicy chunks of cash into your company, I’d recommend three things:
First, have a look at some of the other articles I’ve written on this area:
Second, sign up to my email newsletter, because I have lots of exciting things to say about how to grow and develop your business, including investment advice.
And third, if you buy me a coffee, I’ll give you some advice on whether this is a good route for your company, and tell you if I can help.
Julia Chanteray
 Photo by Community Friend You might want to give someone shares in your business because they’re going to invest money. You might want to give someone equity because you want them to work in your business, or to motivate someone who already works there.
Getting an equity investment is a great way to get money into your business, because it helps cash flow. Unlike a bank loan, you don’t have to pay it back, so it doesn’t drain your bank account just when you need the money to build the company up. I’ve talked before about how to give someone equity to get them to work for you, often for free, and I’ll write something soon about why you might not want to give shares to employees.
Issuing shares to an investor
There are a few things you need to think about here. If you’re thinking about issuing shares to an investor, you need to think this through really carefully. Remember that, unlike a bank loan, equity is forever. You’re probably going to have that investor for the rest of the life of your company. Sure, in the future, you might buy the shares back, or the investor might sell their shares to someone else, but if you are the owner of a 1-50 employee type company, my experience shows that the investor is probably going to be around forever.
So remember that every time you pay yourself a dividend from the company, you’ll be paying that dividend to the investor as well. If you have 80% of the shares, and Ms Investor has 20%, and you have 100k of net profit to be issued as dividends at the end of the year, you’ll be paying her 20k. Every year. And she doesn’t have to do anything to earn that money. I’m not saying that this is a bad idea; I’m just saying that you have to be aware of this right from the beginning.
So do spend a little time getting to know your investor, what her motivations are, and working out if the investment is worth it for you.
Friends and family investors
Here’s a special note if you’re thinking about giving shares to friends and family. It’s very common to get investment in this way but be aware that your family may still see this as a loan and there may be an emotional price tag to the money. Will you always have to watch what they want on TV at Christmas if you take their money, or will they feel entitled to lecture you about the business because they invested 20k?
Get it all written down
Get a shareholders’ agreement when you issue shares. I can’t emphasise this enough, and have been known to jump up and down and stamp my little feet with clients who don’t think this is necessary. A shareholders’ agreement will make it very clear how it all works and what the expectations are on both sides. It will protect both of you. Ideally, get a good commercial lawyer to draw this up for you, but if you can’t afford this, then at least get one from Netlawman or another online legal docs company. For 35 quid, and an hour’s work, I promise you this will save you headaches in years to come.
How to actually issue the shares
Check that your memorandum and articles allow you to issue the shares, and how many shares you have already. If you only have 1 share, you might have to issue more in order to give 20% of your company to someone else. Fill out form SH01 with Companies House so they can keep a record of the shares. You don’t need a share certificate or anything 18th century – it’s what’s on record at Companies House that counts.
For all the boring stuff, Business Link has a good guide. My advice though is to get your accountant to do all the boring stuff for you. They like that sort of thing, and should do it properly. They can also go through the tax implications for you.
Tax things to think about when issuing shares
This really depends on whether the shares you’re selling are worth anything. If you’re a new start up, or haven’t got any sales yet, the shares are probably not worth anything, so there are no real tax implications. Don’t quote me on this; it’s up to you to check this out your own situation.
If you’re further down the road, or you’ve spent a lot of money on setting up the business, the shares could be worth money. So you need to speak to HMRC to see what they think. They want to know if you’ve given your investor something for nothing.
HMRC’s thinking goes like this:
- The company gives the investor shares worth (on paper) 500k in exchange for 100k of cash. So (on paper) the investor has made 400k. So HMRC want to tax them on the 400k they’ve just made. They want their piece of the pie.
You don’t want to lumber your investor with a fat tax bill, so it’s best to be really clear about this beforehand, and this is where an experienced accountant is really worth their sausages.
Summing up
- Think things through
- Keep it simple wherever possible
- Get a shareholders’ agreement or I’ll come round and shout at you
- Make your accountant do all the boring stuff and check out the tax implications with HMRC first
If you’d like some help to make a decision about whether an equity investment is the best route for you, and maybe to look at the options for getting cash into your business, then do get in touch. I won’t do the boring bits for you, but I can help you make the right choice.
Julia Chanteray
 Phoenix by jurvetson Since the recession began, I’ve seen an increase in the number of business phoenixes. A phoenix happens when a business closes down one day, and then opens the next day as a completely new company, but with the same staff, directors and customers. You can usually tell this has happened by a slight change of name, a different bank account, and the directors looking exhausted but relieved.
Businesses usually phoenix (if we can use it as a verb) because they are in trouble and have big debts around their shoulders. Ethically, the difference seems to be that some businesses phoenix because they would not survive otherwise with their huge debts to the banks and some businesses phoenix in order to avoid paying their suppliers. You can tell the difference because the second category (the unethical ones) phoenix again and again. They’re the ones where the directors have taken all the money out of the business before closing it down – you can recognise them when the director is driving a Lexus but telling you that they can’t afford to pay your invoice.
In essence, creating a phoenix company is fairly simple. You put one company into liquidation and open a new company at the same time. The new company now does whatever the old one used to do for the same customers, with the same staff, and a very similar name and brand. Quite often you don’t notice the difference – you could be sitting next to a phoenix right now.
Pros and cons
If you’re thinking that this might be a great way to ditch some of the hassles of business life, such as that troublesome loan which the bank seems to think you will pay back, or that useless member of staff, then do think carefully.
A phoenix strategy has some things going for it, but there are also some serious disadvantages.
- A phoenix has to be done properly and legally otherwise you’ll end up still owing the money but you won’t be able to pay it back because you’ll be in prison for fraud. Get the right advice, from an accountant who has done this before (many accountants haven’t) or preferably an insolvency specialist.
- A phoenix has major long term consequences. You could have that bird around your neck for the rest of your life. If you put a company into liquidation, you are unlikely to ever get a loan again and you’ll have difficulty getting personal credit, even for small items. Some people who have been through this have had difficulty opening bank accounts or setting up online payments, even years after the event.
When you might have to
I’ve worked with three businesses in the last year who have phoenixed. They all tried everything they could to keep the original business going but, when the banks withdrew credit, the directors had no choice. The only alternative was to close down the business for good, and make everyone redundant with no severance pay and walk away. The phoenix was the lesser of two evils.
When it’s bad
A bad phoenix, like most bad actions, has a malicious motivation. When a business owner does this because they have been reckless or greedy, paying themselves big wages when the company isn’t paying suppliers, spending money on lazy, crazy marketing activities such as PR to promote the owners’ egos rather than the products or buying expensive things like cars, or in one case I saw, a giant fish tank for the office when staff hadn’t been paid that month. The company’s assets get sold to the owner’s mum for a fiver at liquidation, and you see Mr Dodgy driving his (sorry, his mum’s) sleazemobile a week later.
How you can make it better
If you’re in a bad situation, and are thinking about phoenixing, or you’ve done it and are feeling morally icky about it, there are some things you can do to make it better.
Firstly, protect the little guys. If you owe your suppliers, and can’t pay them, unless you talk to them they will hate you. Make sure you know that the small companies you owe money to know that they’ll get their money later. A client once paid me the last part of the fees she owed me a whole 5 years after I’d done the work, and I respect her for taking the trouble to do this.
Secondly, ensure that your staff know what’s going on. Staff always have a good idea of what’s going on, and if you tell the truth it will usually be better than the worst case scenario they’ve been imagining. If you’re intending to take staff with you to the new company, this is especially important as you don’t want them to jump ship.
I’ve recently been asked for help by someone who is running a (sort of) social enterprise. He’s been running a business, and on the side of this he’s been doing all sorts of community projects. All brilliant stuff, getting young people involved, providing services to the community – I’m not going to be specific in case you recognise him, but there were lots of great ideas for wonderful things.
This guy had not planned things out, and unfortunately had started a business which was failing. So none of the lovely things could happen, because there was no profit to recycle into the community benefits.
In order to run a social enterprise you need to put the enterprise bit first. You have to run a business, sell things, make money and deal with all of the things that every other entrepreneur has to deal with.
I tell people all the time that making money is a good thing, because money gives you options. For some (non social) entrepreneurs, these are options to make the business bigger, have lovely holidays, do more aggressive marketing or feel secure for once. Social enterprises have a different set of goals – they need to make money to make a contribution to the community.
So making money, and lots of it, is even more important for social enterprises than your regular businesses. If you’re not making a profit you’re just a loss making business, just like all the other failing businesses, but you’re going to feel worse because you’ve set yourself these community goals as well as business goals.
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Julia Chanteray at The Joy of Business helps small businesses to develop and grow. She uses her years of experience of running successful businesses to advise, support and mentor businesses in Brighton, Sussex and London.
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