Seed capital is normally defined as the first money into a company in order to start it.  Typically it is used to pay for expenses such as product development, marketing costs and sundry costs incurred at startup, including legal fees and company registration expenses. We have been involved with many startups over the years and in our experience, it always costs more to fund a company in the startup stage than originally planned. Estimated costs are normally on the low side to actual reality. So raising enough seed capital at the beginning is vitally important. If you don't raise enough, you risk having to go back for more, the "second round". This may have the result of diluting your own shareholding as well as the friends and family who may have helped you out the first time round. Often investors in the second round will realise that you need the money in order to survive and are therefore in a position to take advantage of your situation.

So it is important that you get it right the first time and raise more than you need.  If you require startup funding quickly and the amount of seed capital you require is expected to be relatively small (up to £150,000), then you should consider using the Seed Enterprise Investment Scheme.  This HMRC approved scheme allows your investors to receive generous tax benefits by investing in your company.  The following benefits of SEIS will make your fundraising much quicker and straightforward to accomplish. This we know from experience. We have just assisted a small technology company in regard to getting SEIS HMRC approval and it was the SEIS approval by HMRC that made all the difference to investors.

10 Reasons to use a Seed EIS to Raise Money

Below I have listed what I consider to the be the top 10 benefits of the Seed Enterprise Investment Scheme to help raise seed capital:

1. HMRC approval: Assuming the company complies with the Seed EIS rules, HMRC will give the company an advance assurance that it qualifies for Seed EIS status.  Although HMRC are not making any judgment on the merits of the underlying business, it does provide investors some degree of confidence that HMRC have reviewed and approved its SEIS status.

2. Generous 50% tax relief: A Seed EIS investor will receive income tax relief at 50% in respect of qualifying Seed EIS shares up to an annual maximum investment of £100,000.  This means that if an investor invests £100,000 in a Seed Enterprise Investment Scheme they will get £50,000 back from HMRC. A strong incentive indeed to use a Seed EIS to raise seed capital.

3. Basic rate taxpayers get the 50% tax relief: Even basic rate taxpayers receive relief at the 50% tax rate - the 50% income tax relief is irrespective of the taxpayer’s marginal rate of income tax.  Therefore, if a SEIS investor is paying basic rate tax at 20%, you can still claim the full 50% income tax relief.

4. Each spouse gets the 50% tax relief: Each spouse can individually claim the relief on a £100,000 investment per tax year.  Therefore the SEIS investment limits apply to individuals.

5. 2012/2013 No Capital Gains Tax: A Seed EIS Investor can benefit from a further capital gains tax (CGT) exemption of up to 28%, where an individual makes a capital gain in 2012/2013 and reinvests the proceeds in qualifying SEIS investment before 6 April 2013 (up to a maximum of £100,000).

6. 28% CGT tax relief on the eventual sale of the SEIS shares: There is a capital gains tax (CGT) exemption where SEIS investment shares are sold more than three years after they are issued. Therefore, this is a saving of up to 28%.

7. 40% IHT Relief: A Seed EIS investor can protect their assets from inheritance tax - after three years the investment qualifies for full inheritance tax Business Property Relief (BPR).  The inheritance tax rate is currently 40% of assets chargeable in an estate.

8. Up to 100% Loss Relief: In a loss situation, the investor's combined loss relief can be worth up to 103% of the investment made, being the combination of income tax relief, capital gains tax relief and the loss relief (when all the investment is lost).

9. Directors can invest in their own companies: The investor can be a director of the Seed EIS company. This gives the opportunity for Investors to pay an important stewardship role in the new company, possibly providing much needed experience to the new startup.

10. Investment locked in for three years: Under Seed EIS rules, in order to qualify for the above tax benefits, the investor must keep the money invested in the company for at least three years.  This provides a significant benefit to the company as it gives them some breathing space between the company startup and investors starting to ask for their money back.

I think it is clear from the above that we are very much in favour of the Seed Enterprise Investment Scheme and would strongly recommend anyone wanting to raise seed capital to consider it.  Perhaps we are wrong? Please give us your thoughts and experiences on Seed Enterprise Investment Schemes in the comments section below.

Sapphire Capital Partners LLP is authorised and regulated by the Financial Conduct Authority to conduct investment business.