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.
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