When it comes to making investments for the first time, there’s a lot of jargon to get your head around. The good news? By taking some time to learn the language there’s often a lot of upside — for instance investing in certain fund types can have significant tax relief for eligible investors.
Traditionally, venture capital investment in private companies was difficult to access for individual investors. Thanks to a number of schemes from the government, and platforms like Seedrs, it’s easier than ever to make investments in a wide range of companies via venture capital funds.
At Seedrs, we like to keep things simple for investors and entrepreneurs alike, so we’ve broken down the key terms and acronyms to get you up to speed quickly before you make your next investment in a fund.
VC Fund Structures
There are a number of different venture capital fund types, each with their own unique structure. Understanding the implications of each is important when deciding whether an investment is right for you. At a high level, the main structures for funds you may be able to invest in are:
- LP Funds, or Private Limited Partnership Funds
- Accelerators and Incubators
- EIS Funds, or Enterprise Investment Scheme Funds
- SEIS Funds, or Seed Enterprise Investment Scheme Funds
- VCT, or Venture Capital Trust
On top of the potential tax benefits (more on that later), there are advantages to investing in a fund. The most obvious is that an expert team of analysts will take on due diligence of companies, accessing high quality or faster, more private deals that are not always available to individual investors. Investing in funds also brings a level of diversification that is more difficult if an investor is picking each individual investment themselves.
VC funds typically have a life cycle of around ten years, due to the long timeline from early investment to exit for startups. Funds typically invest in new companies for 2-3 years, deploy most of the fund’s capital within five years, and return capital to investors within ten years.
Funds take around five years to fully deploy as managers typically reserve sufficient capital to invest in follow-on funding rounds. These follow-on rounds allow managers to invest more capital into companies that are performing well and raising further funding, so the fund can maintain or grow its percentage ownership.
Here’s what you need to know about each fund type:
LP Funds — Private Limited Partnership Funds
The classic venture capital investment structure — most traditional VC funds will be set up as a Limited Partner Fund. Unlike EIS, SEIS and VCT funds, LP funds can operate internationally, allowing them access to a wider range of businesses, and attract a broader set of investors. Some funds will focus on a specific geography, while others may be global. Investing in established and emerging global markets alike can provide greater diversification to investors.
LP Funds are normally only available to institutional and ultra high net worth individuals given the high investment minimums, meaning access can be limited for most people. Seedrs is increasing access to LP Funds; by acting as a Limited Partner on behalf of Seedrs investors, eligible investors can now access highly respected funds like Passion Capital and JamJar Investments.
While there are fewer tax benefits available to UK taxpayers with this type of investment vs EIS / SEIS funds, it’s a way to diversify your portfolio with a focus on high growth-potential companies.
JamJar Investments Fund II and Passion Capital Fund III are examples of LP funds that have raised on Seedrs recently.
Accelerators and Incubators
Accelerators, Incubators and Venture Builders are an important part of the early stage ecosystem, and vary in composition.
They typically follow a programme of mentorship, training, and workshops, and are often followed by financial support. Whilst many of the more established accelerators and venture builders such as Y Combinator and Techstars now deploy more traditional Venture Capital (VC) or LP structures, many use the cohort model to raise their first fund.
When accelerators and incubators raise on Seedrs, it is referred to as a Cohort Campaign. These campaigns allow cohort managers to raise capital to be deployed into a series of individual companies as part of an accelerator program.
Tax benefits to the individual investor will vary based on the companies included and investor eligibility. If all the companies are SEIS or EIS eligible, the tax benefits of investing in SEIS or EIS eligible companies are passed on to the individual investor of the fund. SEIS and EIS tax relief is only available to UK taxpayers. To learn more about tax relief, take a look at this article.
For investors, accelerators and incubators provide the ability to back a cohort of early stage companies, sourced by the cohort manager. Since 2017 Sustainable Ventures, a top 5 impact investor in the UK, has raised 5 Sustainable Accelerator funds on Seedrs. These funds have been used to invest in and develop 36 promising young businesses through its accelerator programme. The 12 month programme includes investment and tailored support from the Sustainable Ventures’ team of climate tech experts, and has resulted in an average 3x valuation uplift across the 12 month programme, with a 95% business survival rate.
Accessing a selection of companies at such an early stage can be incredibly challenging, and whilst much higher risk, investors get the benefit of relatively attractive valuations and the expertise and network of the cohort manager.
EIS — Enterprise Investment Scheme
Launched in 1992 by the UK Government, EIS was designed to stimulate investment and growth in the economy post-recession. The idea is that due to the high risk nature of investing in early stage businesses, HMRC provides tax incentives in return to UK tax paying investors.
There are a number of criteria that companies must meet to raise using EIS, making the structure well suited to early stage and growth companies. These include only raising £5 million a year, £12 million in total, and spending the money raised within two years.
So, what are those tax incentives for investors?:
- Income tax relief for investors into EIS funds up to 30% of the investment (capped at £1 million total investment per year) — this is applicable to the year of investment and the year before.
- No capital gains tax to pay on investment gains.
- Loss relief
- Deferral relief – CGT deferral on invested gains.
- Inheritance Tax relief – IHT free after 2 years
This scheme has led to the creation of EIS Funds. These are a type of tax efficient VC fund that review and invest in EIS-eligible companies, passing on tax benefits to the fund’s underlying investors. High profile UK VCs like Molten Ventures (formerly Draper Esprit), MMC Ventures, and Praetura Ventures, all manage EIS funds.
There is more guidance on the specifics of the tax relief available on the Gov.uk website, and we also have a useful guide to claiming EIS relief. As always, we’d recommend speaking to a qualified tax professional to look at how investing in EIS schemes would affect your personal tax situation.
SEIS — Seed Enterprise Investor Scheme
SEIS has a lot in common with EIS, but aimed at companies at an earlier stage of growth. To be eligible for SEIS, companies must have less than £200k of assets (increasing to £350k from April 2023). The company must also be less than two years old (increasing to three years from April 2023). Just like EIS funds, there are SEIS funds that invest in SEIS eligible companies, passing on the tax benefits to investors in the fund.
The eligibility criteria for SEIS typically increases the risk profile of the business raising investment, and as a result the tax incentives are greater:
- Income tax relief for investors into SEIS funds up to 50% of the investment (capped at £100k total investment per year)
- Capital Gains relief
- Loss relief
- Deferral relief – CGT deferral on invested gains.
- IHT relief – IHT free after 2 years
High profile UK VCs Ascension Ventures, Fuel Ventures, and SFC Capital all manage SEIS funds.
For both SEIS and EIS you have an option as to when you claim the tax relief; either in the year you make the investment, or the year prior to making the investment. You can read more about how this is applied on the gov.uk website.
VCT — Venture Capital Trust
Venture Capital Trusts are similar to EIS funds. They invest in a portfolio of companies, but the VCT is publicly listed, making it much easier for the individual investor to buy and sell shares. Due to the broader nature of the investment (not all companies will be EIS eligible), the tax incentives are not as strong as EIS. However, they’re still worth considering and VCTs may offer a more diversified opportunity than some other fund types.
Tax incentives include:
- Income tax relief for investors into VCTs up to 30% of the investment (capped at £200,000 total investment per year)
- No capital gains to pay on investment gains
- Tax relief on income from dividends
Typically you must hold shares on a VCT for five years to qualify for relief, more info here.
Interested in accessing venture capital funds on Seedrs?
Learn more at Seedrs.com/VCfunds
Seedrs does not provide tax advice of any kind, and nothing in this document constitutes such advice. If you have any questions with respect to tax matters relevant to your interactions with Seedrs or its affiliates, you should consult a professional tax adviser.