Date: 16 September 2021
Author: FINTECH Circle
Have you ever wondered how to become an angel investor? Or how to expand your fintech investment portfolio?
FINTECH Circle recently hosted a session with seasoned fintech investors and investing experts, sharing insights on how to start investing in the most innovative fintech startups and which attractive tax advantages are available in the UK.
The panel members consisted of:
- Deborah Angel, Partner, Deloitte Legal
- Gordon Rowell, Associate Director, Deloitte UK
- Mallika Paulraj, Angel Investor & Author of ‘How the Best Invest’
- Susanne Chishti, Founder & CEO, FINTECH Circle
Read on for a few tips on how to start and what the benefits of investing in fintech startups are or watch the full webinar.
Creating your portfolio
While investors’ main goal is to preserve capital in the long run, it’s important to at least beat inflation as otherwise your capital will be eroded. Therefore, diversifying investments, not putting all your ‘eggs in one basket’ and placing a small percent in startups and private companies is an option many investors have taken to add more return potential to their portfolios.
In order to choose wisely which startup to back, investors should create or join an investor network, do their own research and carefully choose sub-sectors to focus on. Being part of a network is essential in angel investing and having multidisciplinary connections with varying knowledge is key to making smart investment decisions. Since the majority of startup founders are very confident and strongly believe in their product, it can sometimes be easy to get blindsided and becoming convinced to back a company that doesn’t have a bright future. The way to protect yourself from being misled is to connect with other like-minded, experienced investors and mentors, who have knowledge in particular sub-sectors and can help guide you and offer advice.
A few things to look into before deciding on which startup to invest in:
- The founding team – do they work well together, did they have previous exits, past experience, knowledge in the sector…
- The technology the company uses and its business and financial model
- The traction so far
FINTECH Circle has created a network of private investors benefiting from UK’s position as a global fintech leader, and FINTECH Circle’s community of innovative fintech startups. To find out more and join the Investor Network, click here.
Investors are eligible for tax benefits if they have a tax liability in the UK, so it’s important to be aware of the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS).
The SEIS scheme is a tax relief aimed at relatively new startups (not trading for more than two years). They must carry out a qualifying trade and have no more than 25 employees. It’s vital to understand the business the startup is conducting since some activities are excluded (e.g., money lending). Under SEIS, it’s possible to invest up to £100,000 per year!
There are numerous advantages under this scheme since the reliefs are targeted at high-risk startups. In order to compensate the investor, the relief is 50% of the amount invested (example: if one invests £100,000 of their own money in a year, the investor receives a tax credit of £50,000 against their UK tax liability).
One of the great benefits of SEIS is that if the company goes on to do really well and successfully exits after the investor has held the shares for at least three years, the capital gain released will be exempt from capital gains tax.
The EIS scheme is aimed at small to medium companies. The latter can have up to 250 employees and growth assets of less than £15 million. Although the investor can invest £1 million each year, the tax relief on EIS investment is at 30%.
One can also defer some of the capital gains tax. For instance, if the investor is making capital gains and has £1 million of gains and makes £1 million of EIS investment, they can defer the gains on a pound for pound basis and therefore don’t pay capital gains tax until the moment they sell their EIS shares. Delaying payments of tax by making EIS investments can be a benefit if the investor is in the process of making gains.
The good news is, there is protection against the downside both under SEIS and EIS. If the company goes bust, the investor gets another chance at tax relief by receiving a deduction from one’s income tax liability.
Practical terms when investing
The investor should always conduct due diligence and ask the company about advanced assurance. This is a letter from HMRC in advance of the fundraising round giving provisional approval that the company, the trade, and the proposed fundraising will qualify. Furthermore, once the investor has had their shares allocated, the company has to formally acknowledge this and state that they’ve issued these shares, proposed either EIS/SEIS, and submit the relevant forms. This is important for the investor so they can claim the tax reliefs through a self-assessment tax return or by getting a tax release put in the tax code for the rest of the year.
Investors’ influence on the operations of the startup
Investors usually don’t have influence or control over the day-to-day operation of the startup but the company shareholders agreement suggests that before a company can carry out key decisions, it must obtain the approval of a majority of its investors.
They have a veto over key matters like issuing new shares, raising new money, borrowing new money and selling the business. Investors can’t control the board of directors but may have a representative on the board or a less formal non-voting observer. However, investors should get regular status updates on the monthly management accounts, quarterly financial summaries and annual accounts.
For more benefits and tips on how to start investing, check out the session below or join our Investor Network to access the investment opportunities most innovative fintech startups.
Nothing contained in and accompanying this article shall be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation to purchase any security by FINTECH Circle or any third party. Information regarding FINTECH Circle’s Investor Network and the investment opportunities are available for sophisticated/self-certified investors only. This article does not provide tax advice. Always consult your own investment and tax advisors before commencing to invest in startups.
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