It seems the startup and business world just luurve a 3 letter acronym! I’ve put together some simple explanations to unravel some of the 3 letter beasts banded around regularly, as well as some of their longer compatriots .
This is Part 1, Part 2 to follow.
Word in bold and caps have their own definition elsewhere in the post.
This is a piece of paper issued by HMRC that confirms a company is eligible for SEIS, EIS or both. It’s not fool proof, it’s only as good as the information provided to HMRC in the application.
When a shareholder leaves the company, if she is classed as a bad leaver, she may be required to sell her shares back to the company at an undervalue. If you commit a criminal offence, breach the terms of your service agreement or leave after a short period of employment, you could be classed a bad leaver. The definition varies per company and would usually be contained in the shareholders agreement.
When SHARE OPTIONS are granted, often a period of time must pass before they VEST. There can be multiple vesting stages (e.g. 1 year, 2 years, 3 years). A cliff refers to the final VESTING period, at which point all remaining SHARE OPTIONS vest.
The Enterprise Investment Scheme is a brilliant Government initiative that gives tax breaks to individuals to encourage them to invest into high risk businesses i.e. most startups. There is a generous set off against income tax (30%) and also CGT benefits when you later sell the shares at an increased value. Or, if it all goes wrong (sorry to be the voice of doom), there are further tax breaks on the loss.
The Enterprise Management Incentive scheme is a tax efficient scheme to incentivise employees through SHARE OPTIONS. Employees are granted the options with a fixed exercise price (usually the company’s then current valuation). Once the exercise price is paid by the employee, they will be issued with shares in the company. If the scheme is set up correctly, there is no income tax payable when the options are granted or exercised and no income tax payable when they are later sold – just CGT is payable.
When a shareholder leaves the company, if she is classed as a good leaver, she may be able to keep her shares or if she is required to sell them it would be at value. Examples of good leaver circumstances, would be illness or disability. The definition varies per company and would usually be contained in the shareholders agreement.
Minimum viable product is the earliest version of a product that can be released to customers. It will often just about work and will be far from perfect. The common school of thought is to release as soon as MVP is reached, to start getting early customer feedback, rather than building and spending in a direction that is unproven and untested.
A funding round where a company sells shares to investors. ‘Seed’ indicates the stage, which is very early, often pre revenue and pre MVP.
The Seed Enterprise Investment Scheme is the same as EIS in many respects, save for a few tighter restrictions (i.e. on what can be raised and the age of the company) and a better rate of set off against income tax (50%).
A funding round where the company sells shares to investors. ‘Series A’ indicates the stage, which is after the SEED ROUND and usually when the company has data to show that customers will buy its products and services (often called “traction”).
Companies grant share options to incentivise and retain staff, sometimes under an EMI SCHEME. They may be exercised by the holder usually for a price, at which point the holder will be issued with shares in the company.
Uniform Resource Locator – Clearly, I don’t need to explain this but most people don’t know what the U R and L stand for, so voila!
Venture Capital Trust is the ‘company’ version of EIS and SEIS. EIS and SEIS benefit individual investors and VCT brings tax breaks for organisations. You are unlikely to come across VCT until after your SEED ROUND.
When SHARE OPTIONS are granted, often a period of time must pass before the employee can actually get their hands on them. This is done to retain and incentivise team members. There may be more than one vesting stage (e.g. 1 year, 2 years, 3 years). Once that period of time has passed and the options have vested, the holder will usually be free to exercise them, meaning they will be issued with shares in the company.
This is Part 1, Part 2 to follow … if you’re still awake.
Many of these terms relates to shares and funding. To meet the man that knows pretty much everything about both these things, join our upcoming dinner with Nick Halstead, founder of InfoSum. He’s raised over $80m for the companies he’s founded and is widely regarded as having one of the smartest technical brains in software.
Dine with Nick Halstead – raising over $80m and being backed by some of the best investors in the world > Find out more
By Kate Jackson