Equity finance is a tool often used to attract investors and raise finance in a non-traditional sense. This type of investment is seen as medium to long term and therefore the correct type of investor is required. Investors can range from:
- friends and family
- business Angels
- other professional investors
There are a number of tax incentives and schemes available and issuing equity as a form of raising finance has been eagerly promoted by the government. The schemes available are:
Venture Capital Trusts (VCT)
A VCT is a tax-efficient UK closed-end investment scheme designed to provide private equity capital for small expanding companies and capital gains for investors. VCTs are often used by entrepreneurs, wealthy individuals or investors who provide capital in return for an equity stake in the company. The current maximum amount that an investor can invest into a VCT scheme is £200,000 per tax year.
Enterprise Investment Scheme (EIS)
An EIS is a tax-efficient scheme to encourage investment in what is seen as more risky investment in unquoted companies. For a company to qualify for EIS the total assets of the company cannot exceed £15,000,000 and it cannot employ more than 250 staff. EISs are often used by entrepreneurs, wealthy individuals, investors or friends and family investors who provide capital in return for an equity stake in the company.
Read more about the Enterprise Investment Scheme (EIS)
Seed Enterprise Investment Scheme (SEIS)
SEIS is a new scheme and has been introduced to run alongside the other existing schemes. For a company to qualify for SEIS it must have no more than 25 employees and its total assets must not exceed £200,000. SEISs are often used by entrepreneurs, wealthy individuals, investors or friends and family investors who provide capital in return for an equity stake in the company.
Read more about the Seed Enterprise Investment Scheme (SEIS)
The simplest definition of shares is that they define the ownership of a company. There can be a number of share classes that can either distribute the ownership or attribute various rights. This is often seen when companies have different classes of shares, for example A Shares, B Shares etc.
Before issuing shares it is worth having a realistic view of what your company is actually worth. This could mean obtaining a professional value of the company - for example, from an accountant.
A company, if permitted, can issue shares, to existing shareholders or new subscribers. The issue of share capital is governed both by the Companies Act (Companies Act 2006 Sections 549 – 609 (previously Companies Act 1985 Sections 80 – 116)) and by the company's Articles of Association.
It is worth noting that shares cannot be issued at a discount, ie they cannot be issued below their nominal value.
Buying back shares
An often confusing and complicated area, this is where the company buys backs some of its issued share capital and then in essence cancels them. This is often done when a company wishes to reduce its equity, thus lifting the value of the remaining shares, and is often done at a time when a company has surplus cash reserves.
It also gives a company greater earnings per share calculation and possibly higher dividend pay outs for the remaining shareholders. It has been remarked that this potential saving and return could be better than the rate of return should the surplus cash be left in the bank earning a low interest rate return.
The first place to look is the legislation - Companies Act 2006 Sections 658-737 - which contains all the necessary details.
Reducing your share capital
From 1 October 2008 a new means by which a private company can reduce its share capital was introduced by CA 2006 Section 641 and statutory instrument 'The Companies (Reduction of Share Capital) Order 2008' (SI 2008/1915). This procedure also applies to a reduction in those reserves which have similar characteristics to share capital (ie the share premium account and the capital redemption reserve) although it does not apply to any merger reserves.
For private companies neither court approval nor an auditors' report are required. CA 2006 Section 641(2) states that this method of capital reduction cannot be used if after the reduction there would no longer be any member of the company holding shares other than redeemable shares or if the articles do not permit it.