Do growth shares affect S/EIS eligibility?

How companies can benefit from both S/EIS funding and the use of growth shares.

To put it bluntly, when growth shares are issued correctly through Vestd, they do not impact S/EIS eligibility. Here’s why…

One of the criteria of S/EIS is that the shares issued must not carry any preferential rights. This means, amongst other things, that the S/EIS shares must come last in a waterfall, which dictates how the funds from a liquidation or sale of the company will be split among the share classes. As a result, these are generally ordinary shares.

Now you may be wondering what this has to do with growth shares. Well, growth shares also often come last in a waterfall, which would then mean that S/EIS ordinary shares have preferential rights over the growth shares.

However, we’ve structured our growth share clauses to ensure growth shares come before ordinary shares in the waterfall. Here’s how the order of a waterfall would look in the event of a sale or liquidation:

Deferred Shares would get £0.01 between the share class
Holders of Growth Shares would receive their payment relevant to their hurdle rate
Any remaining funds are distributed pro-rata amongst the ordinary share classes (this would include S/EIS shares)

As the S/EIS shares are paid last in the waterfall, there’s no negative impact on their eligibility.

So as long as your company has adopted the Vestd Articles of Association or added the relevant growth share clauses to your existing articles, issuing growth shares won’t impact S/EIS eligibility.

Of course, there are additional criteria that a company must meet to be eligible for SEIS and EIS.

Similarly, the Vestd Articles of Association are designed so that any S/EIS eligible shares don’t have preferential rights to dividends.

The articles allow for differential dividends with the caveat that any class of shares which has previously received S/EIS advance assurance from HMRC, or has been granted S/EIS relief, shall not receive any dividend greater than another class of shares. The only exception to this is the deferred shares, which are not eligible for dividends.

HMRC states that the shares you issue for S/EIS can have limited preferential rights to dividends. However, the rights to receive dividends cannot be allowed to accumulate or allow the dividend to be varied. So again, the Vestd Articles of Association mitigate any risk here.

Further information

The Growth Share structures laid out in our standard Vestd Articles were not drafted by us, but independently for us by CMS, one of London’s leading International law firms. The Vestd Articles were built on the best-in-class BVCA framework with ‘Drag’ and ‘Tag’ provisions incorporated, as well as good leaver / bad leaver provisions and specifically structured to ensure they are S/EIS compliant.

While HMRC does not provide ‘approval’ of Growth Share valuations, the valuations we carry out (effectively a contemporaneous ‘Valuation Record’), follow the “Shares and Asset Valuation” guidance set out by HMRC, and are also used for our EMI Valuation Reports, all of which are submitted for HMRC approval.

We have carried out thousands of valuations (for either EMI or Growth Share purposes) to date, and have several hundred customers using our Growth Shares without issue, including many with SEIS and EIS.

The Vestd Articles and our Growth Share structure have been reviewed by numerous independent law firms over the years, and have been incorporated by them into their client’s articles where required. This includes adoptions by VCs.

As stated above, our approach is consistent with the current HMRC “Shares and Asset Valuation” guidance, and if that were to change we would make adjustments accordingly.

Our team, content and app can help you make informed decisions. However, any guidance and support should not be considered as 'legal, tax or financial advice.'