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We run a UK Limited company that has been around for over 8 years and are considering VC investment. The only issue is that most VCs prefer to invest in companies that are EIS / SEIS eligible, which we are not (> 7 years is the a rule that makes us not).

We have a product that we are developing with a third party company that we would to gain investment in, to bootstrap it particularly in terms of development and marketing.

The question has arisen on the best way to setup another company that will be a ‘product’ company, leaving the original company as a ‘services’ company. The services company could then charge services to the product company.

Which options are better?

  1. The product company be fully owned by the services company
  2. The product company be a ‘peer’ to the services company, and have the same ownership
  3. The product company be a ‘peer’ to the services company, but have a different share ownership to the services company.

Obviously (2) has the problem of sharing the taxable benefits between the two entities, which is not desirable.

The aspects I’m particularly interested in are liability between the two companies and tax efficiency.

Answer 9076

My natural thought would be option 3 - set up a joint venture (JV) between your collaborator and the new product company. This means your eligible for SEIS, which is more desirable than EIS from an investors perspective but limits how much money you can bring in under that umbrella, £150,000 I think. The prospective SEIS company cannot have more than £200k of assets either. I’m not a lawyer or accountant, so please check everything.

This approach also makes the investment “cleaner”. You don’t want to muddy the investment waters by having companies own a part of each other. Your service company could own part of your product company, but again, this was not very well explained by HMRC, so it would be worth checking percentage ownership with a professional .
This latter point may also have further ramifications down the line when it comes to the more lucrative grants/Government incentives. If a non-SME owns more than 25% of a company, it can exclude you. I get the impression your existing company is an SME anyway. It would also be easier if your prospective JV partner is an SME also.

Don’t forget that if you go down the SEIS/EIS line, the shares must not be allocated to the investors prior to application to the scheme. Hope some of this helps.

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