It was always a difficult balancing act for the Government as lending to early stage companies is inherently risky and Rishi Sunak has an obligation to protect the taxpayer.
At the same time, entrepreneurs are the lifeblood of an economy and the UK attracts a huge amount of investment into its tech sector which is where a high proportion of start-up entities operate. These businesses also need protecting, as otherwise the development of new ideas being undertaken by these companies will fall behind rival activities being undertaken elsewhere.
Protecting the taxpayer
Fundamentally there is nothing wrong with protecting the tax payer; indeed, it is absolutely right that the Chancellor do this. However, the Future Fund includes a number of rules and restrictions that either disqualify start-up businesses or make investment unattractive, including:
- The requirement to have raised at least £250,000 in the last five years, meaning that genuinely fledging businesses cannot access the Scheme.
- The need to obtain matched funding of between £125,000 and £5,000,000 from private investors that may not be willing to part with cash at a time of uncertainty.
- That after three years, if the loans have not converted, they are redeemable at a premium of 100% on the subscribed value.
The redemption premium should encourage start-ups to consider whether they can raise the investment without the need to resort to the Government’s terms, or at least be confident of a qualifying funding round taking place to convert the shares at a discount of 20%. The discount itself appears a reasonable basis for conversion.
The matched investment is unlikely to qualify for Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS) relief due to the conversion terms. These reliefs, along with Venture Capital Trusts (VCTs), are generally popular with angel investors who, for a large part, prop-up the start-up tech economy. These groups will absorb the risks of investing in such companies through diverse holdings, balance of equity and debt holdings, and market knowledge.
The Chancellor did not necessarily need to extend other support packages to this part of the economy but should have looked to make it more attractive for others to do so. Widening investor annual and lifetime caps on EIS and SEIS investments, and for a short period increasing the Income Tax relief available (currently being 30% on EIS and 50% on SEIS) would draw in wary investors. As well as being incentivised to do so, they are also able to negotiate their own terms. This is particularly relevant given the Government’s plan won’t meet everyone’s appetite; for example, those comfortable with a longer-term return than three years.
The Chancellor will soon be looking to restart the economy as returning to normal levels of growth and GDP will be an important part of paying-down the cost of Coronavirus support measures, which were quite rightly put in place. This presents a further opportunity to incentivise investment in start-up businesses. There is the added option of focusing these reliefs on money that goes into businesses that will help the new economy such as those that support agile working, cloud-based security and location tracking.
Would you like to know more?
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