UK Fact-File Part 1:
Business Formation for Individuals
1.9 UK Venture Capital
Outside involvement, such as venture capital
investment in a business is a funding possibility. This can
be achieved in several different ways:
- Seed financing, which is made available prior to of the
launch of the business, and provides backing for the development
of the business concept, the creation of a business plan,
market research, and finally, bringing the product in question
to the market. This type of investment usually requires
a fair amount of involvement and support on the part of
the venture capital firm, and is therefore generally a less
popular option, except for specialist firms.
- Start-up financing is designed to provide support for
small businesses through the product development and initial
marketing periods. Smaller start-ups are less likely to
be of interest to VC investors, but as with seed financing,
there are some specialist firms that may be willing to invest.
- Early stage financing: Designed to provide support during
the manufacturing and sales process to businesses that have
developed their product, but are not yet profitable.
- Development/Growth financing: Designed to assist in the
expansion of an existing company.
The way in which the financing reaches the business will
vary according to the arrangement that is reached with the
venture capital firm or investors in question. However, as
a general guide, investors (public or private sector) may
become involved in an individual’s business in several ways,
including the following:
- Preference shares: Holders of preference shares receive
priority with regard to the payment of dividends, and receive
a fixed dividend amount. However, they have no voting rights.
(Only of interest to incorporated businesses);
- Ordinary shares: Voting shares and non-voting shares
are available; both offer an equal share of the profits,
but the latter are usually less valuable, as they do not
allow the shareholder to vote on policy matters, or on the
composition of the company’s board. (Only of interest to
incorporated businesses);
- Debentures: A type of medium to long-term loan, repayable
at a fixed rate of interest, which can be secured or unsecured.
Convertible debentures can be converted to equity shares,
at a future point;
- Secured loans: Loans provided with an asset belonging
to the borrower as security; the asset can be claimed by
the lender, in case of default;
- Unsecured loans: Usually offered based on the borrower’s
credit rating, unsecured loans can be personal (with the
individual responsible for repaying the loan), unsecured
business loans (with the business responsible for repaying
the loan), or unsecured business loans with a personal guarantee
(where the individual giving the guarantee is responsible
for repaying the loan if the business defaults. Suicide
is quicker.
In April 2010, as part of an effort to ensure compliance
with European state aid rules, the government produced an
evaluation of its Venture Capital Schemes, the Enterprise
Investment Scheme (EIS), Venture Capital Trusts (VCTs) and
Enterprise Management Incentives (EMI), which give tax relief
to investors in small companies.
The EIS and VCT schemes aim to improve small higher risk
trading companies’ ability to secure longer-term financial
support in the form of equity investments. They do this by
offering investors income, capital gains and corporation tax
reliefs in return for investing in small companies undertaking
an activity that qualifies under either scheme.
EMIs are tax advantaged employee share schemes, under which
companies can offer their employees share options with income
tax and National Insurance contribution advantages. EMIs are
designed to help smaller companies, particularly in the riskier
areas of the economy, to recruit and retain the staff they
need to grow.
Small companies eligible under the schemes are defined as
having gross assets not exceeding GBP7mn before the share
issue and GBP8mn after; employment must be less than 50 full-time
equivalent employees when shares are issued. There are also
rules to ensure companies are independent and trading. Certain
activities are excluded from the schemes in order to target
higher risk trades more in need of support.
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