Business Proposal - New Venture

Corporate Tax | Start-ups

An entrepreneur with a track record of successful exits was launching a new venture and sought advice on the optimal structure.

The new business was in the technology sector, with plans to raise external investment within the first twelve months and an ambition to achieve significant scale.

Structuring a new venture requires balancing multiple considerations:

Tax Efficiency: The structure should minimise tax on profits and maximise the availability of reliefs, including R&D tax credits, enterprise investment scheme (EIS) benefits for investors, and entrepreneurs' relief (now Business Asset Disposal Relief) on any future exit.

Investment Readiness: Institutional investors have specific requirements. The structure needs to accommodate preference shares, anti-dilution provisions, and other investor protection mechanisms without creating tax complications.

Founder Incentives: The founders wanted to ensure that their equity was taxed as capital on exit, not as income. This required careful attention to the employment-related securities rules.

Flexibility: The structure needed to accommodate future growth, including the possibility of international expansion, additional investment rounds, and eventual exit by trade sale or IPO.

We worked with the entrepreneur to design an optimal structure:

We recommended establishing a new holding company with a subsidiary operating company. This would provide flexibility for future investment and allow for tax-efficient profit extraction through dividends.

We advised on share capital structure, recommending alphabet shares that would allow different rights to be attached to shares issued to different classes of investor.

We prepared a paper on EIS qualification, advising on the conditions that needed to be satisfied for the company to issue shares under EIS and the actions that could jeopardise EIS status.

We advised on founder share awards, ensuring that shares acquired by the founders would qualify for capital treatment on exit. This involved considering the timing of share awards, the use of growth shares, and the availability of section 431 elections.

We modelled the tax outcomes under different exit scenarios, showing the entrepreneur the expected tax treatment of their equity under trade sale, IPO, or earnout arrangements.

We also advised on early-stage tax planning opportunities, including R&D tax credits, patent box, and the seed enterprise investment scheme (SEIS) for initial investors.

Outcome

Optimal venture structure designed and implemented.

EIS-qualifying company established with appropriate share capital structure.

Founder equity secured for capital treatment. Business launched and successfully raised seed investment within six months.

This case study is based on a real client matter. All identifying details have been removed or changed to protect client confidentiality.