The Enterprise Investment Scheme is a government initiative by the British Government to help new businesses and their investors.
How The Enterprise Investment Scheme Works For Founders
Starting a business is very exciting. You’ve got a great idea and formulated a plan to make it work! But most business ideas require capital in order to be realised.
In seed and early stage companies, selling equity is pretty much the only way to raise capital, since most corporate lenders will require a minimum of 2 years trading and at least your first year’s accounts. And that’s before you consider whether your business can deliver the return on capital required to service a loan interest rate of around 10%.
And while all investing inherently carries a level of risk, investing in startups is as risky as it gets for investors, so it can be very difficult to get them to commit money to your company.
So, say what you like about the government, but they created the Enterprise Investment Scheme to mitigate the risk faced by investors.
The Enterprise Investment Scheme helps founders to raise money to grow their businesses.
How The Enterprise Investment Scheme Works For Investors
Provided that your company plans to carry out a trade that meets their criteria, the government will offer tax breaks for investors and take a lot of the risk that investors would otherwise have to shoulder when investing in startup or very young companies.
Investors will get to write-off 50% of their investment against tax, immediately. So if your uncle Dave can be convinced to invest £10,000 into your company, he can write £5000 off against his tax bill on his next income tax return.
He must keep the shares for 3 years. And after that, if the shares he bought are now worth zero, uncle Dave can write off another 20% of his investment against tax.
So while he invests £10,000, the maximum he stands to lose is £3000.
On the other hand, if your company becomes a household name by the end of three years and uncle Dave’s shares are now worth £1,000,000, when he comes to sell his shares – most likely back to the company – there is no capital gains tax on any of that money.
So for investors, the Enterprise Investment Scheme offers a substantial reduction of risk and potentially unlimited gains.