Raising equity finance

It is important to remember that in raising equity finance you are selling shares which represent a part of your company.

Equity finance can come from a number of sources, including family and friends, business angels, venture capitalists, special equity funds and flotation.

Only around 2% of companies succeed in finding equity investment. To succeed, you must have an exciting proposition with good growth prospects and a strong management team. Investors are generally looking for something beyond the concept stage.

The management team should be able to demonstrate sector experience and have a track record of running a successful business.

In many cases the total funds required will be raised from a number of sources, perhaps angel funding combined with capital or debt from specialist venture funds and even mixed with bank lending under an Enterprise Funding Guarantee (EFG).

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Stages of company development and funding needs

Seed capital
Pre-start - cash required for research or to develop a prototype.
Start-up
You have researched the market but have no sales yet.
Early-stage
You have generated a few sales and need cash for marketing and operations.
Expansion
You are generating revenue but need cash for new products or new markets.

Business angels

Business angels are widely recognised as playing an important role in the provision of smaller amounts of risk capital for seed, start-up and early-stage companies.

Most angels invest less than £100k but they provide more than just money, normally playing a hands-on role in the business and bringing valuable contacts.

There are many organisations which provide a matching service, bringing together entrepreneurs seeking funds and a network of private investors. Investors may group together in syndicates to fund larger deals.

Pegasus acts as an approved intermediary for many of the largest angel networks in the UK. The typical range of funding for one business through an angel network is between £100k and £2 million.

Click here to download the 'Angel Funding Datasheet'

Crowdfunding

This has been an interesting development and comes in two forms; equity crowdfunding and debt, or loan crowdfunding. The principle is the same in both cases; multiple small investors combine to invest in or lend money to a company.

The amounts invested can be quite small, often only a few hundred pounds from each investor, so the risks to a single individual are limited. This is an interesting way for start-up companies to gain their first lease of life. However, it is also important not to overlook one of the advantages of traditional business angel investors – the experience and contacts that they often bring with their investment.

Venture capital

Venture capitalists will usually be looking for deals of £2 million plus. They will also be considering an exit within three to five years through trade sale or flotation. They will want a significant stake in your business and high returns. However, we have access to funders willing to invest at an early stage for strong management teams and propositions.

Equity or venture funds

There are funds specialising in specific sectors or regions – often backed by government agencies. These specialist funds and trusts offer investment in start-up or early-stage companies but they will be looking for matched funding from other investors or lenders.

Flotation or market listing

This is often referred to as an Initial Public Offering (IPO). By listing on one of the financial markets, such as ISDX or AIM (Alternative Investment Market), companies can raise their profile and gain credibility whilst accessing larger capital sums. Drawbacks of flotation and listing include the costs involved and the associated regulation with reduced liquidity for the shares.

At Pegasus Funding Resources, we have access to specialist non-executive directors who have experience of floating on AIM and who can guide you through the process.

Venture capital trust (VCT)

VCTs were set up by the government to provide investors with tax incentives to encourage them to invest in small businesses. An investor in a VCT can benefit from:

  • Up to 30% income tax relief each tax year on investments up to £200,000 (to retain this relief the investor must keep the VCT shares for at least five years).
  • Tax-free dividends.
  • No Capital Gains Tax.

Tax treatment is dependent on investors' individual circumstances and may be subject to change. The availability of tax reliefs also depends on the VCT maintaining its VCT qualifying status.

Click here for the Corporate Venturing Scheme documentation. 

Enterprise Investment Scheme(EIS)

Some investors will want to make sure that your company qualifies for investment under the EIS scheme. EIS offers generous Income Tax and Capital Gains Tax reliefs to investors in certain companies.

Broadly speaking, the business activity for which the money is being raised should be conducted in a qualifying trade wholly or mainly in the UK and the gross assets of a non-group company, or aggregate gross assets of the group, must not exceed £15m prior to investment nor £16m post investment.

Income Tax relief is available on the amount invested up to a total of £300k in any one tax year and a maximum of £1m in total. Potential Capital Gains Tax (CGT) relief is applicable on disposal of shares if held for more than three years, and the investment limit is not exceeded, and CGT deferral is available on a gain from the disposal of any other asset against an EIS share subscription. Relief is available at 30% of the cost of the shares.

Tax treatment is dependent on individual circumstances and may be subject to change.

Seed Enterprise Investment Scheme (SEIS)

The SEIS is focused on smaller, early stage companies carrying on, or preparing to carry on, a new business in a qualifying trade. The scheme makes available tax relief to investors who subscribe for shares and have a stake of less than 30% in the company.

1. A company can raise no more than £150,000 in total via SEIS investment.

2. The company must be no more than two years old.

3. The company must have assets of less than £200,000.

4. The company has to trade in an approved sector – generally not in finance or investment.

5. The company seeking investment must be based in the UK and have a permanent establishment in the British Isles.

6. The company must have fewer than 25 employees. If the company is the parent company of a group, that figure applies to the whole group.

The company can follow a share issue under SEIS with other shares under EIS, or investment from a Venture Capital Trust (VCT). It must have spent at least 70% of the money raised by the SEIS share issue before issuing any more.

Relief is available at 50% of the cost shares on a maximum investment of £100,000 and shares must be held for a minimum of three years.

Tax treatment is dependent on individual circumstances and may be subject to change.

 

To find out more please contact:

Richard Olsen on 0203 327 0567 or email: info@pegasusfunding.co.uk.