The Seed Enterprise Investment Scheme (SEIS) offers investors plenty of tax reliefs as an incentive to take on the risks associated with investing in very-early-stage ventures. Fund managers have been quick to capitalise on these generous tax incentives and developed the SEIS fund as a vehicle to allow investors to spread some or all of their SEIS allotment across a wide range of early-stage businesses. As with most fund structures, those managing the fund charge an assortment of fees for the management of the fund. These fees can include arrangement, management and a cut of carry (a percentage-based charge that is taken out of the profit the fund delivers).
Having conducted our own research into SEIS funds and the fees associated, we’ve put together a table displaying the range of fees deemed ‘normal’:
|Initial fee range||2%–7%|
|Management fee range||1%–3%|
|Cut of carry||10%–25%|
In addition to charging investors, some funds also charge the companies in which they are investing for things like ‘monitoring’, placing a director on the board and even for arranging the investment. Double dipping indeed.
The fees mentioned above can be quite high, so it is important to know how this impacts on the investments that can be made through the fund and the potential for return. Here’s an example showing how much of the amount an investor invests actually ends up in company’s hands:
Let’s imagine you put £20,000 into an SEIS fund where the initial fee is 2% and the management fee is also 2%. The minimum level of investment into the fund is £20,000. The initial fee may be a meagre £500, but over a five-year period the management fees can amount to 10%, or £2,000, of the total funds raised. Add these up and out of the £20,000 you’ve invested, only £17,500 is being used to invest. If the fund then charges the company for arranging the investment, monitoring and other items, the actual amount of your investment being put to good use is even smaller.
Now let’s say that the fund is aiming to invest in ten companies. On average each company would receive a £1,750 share of your investment. Given that the fund managers have taken out £2,500 from your investment, had you invested that money yourself you could have invested in at least one more company, or put £2,000 into each company instead of £1,750 and received a slightly higher share of equity.
Wouldn’t it be nice if you didn’t have to pay those fees and could get that extra investment into your portfolio?
One alternative to investing into a fund is to build your own early-stage investments portfolio by investing directly into these companies via an angel network or online platform, such as SyndicateRoom. Being a part of an angel network is great, you can review and discuss opportunities with fellow members of the group and invest in the companies you feel comfortable with. SyndicateRoom takes that experience and puts it online with the added benefit of sourcing investment opportunities from multiple angel networks and early-stage venture capitalists.
The additional benefits of investing through SyndicateRoom are as follows:
- Before any opportunity makes it onto the SyndicateRoom platform, the opportunity receives a commitment from a lead investor, or investment group, of at least 25% of the funding round
- SyndicateRoom members invest at the same price per share, and with the same share class, as the lead investors in the round
- Building your own portfolio ensures that you know exactly what is going into it
- You dictate the amount invested into each company
So next time you consider investing into an EIS or SEIS fund, have a click around and look at what equity crowdfunding platforms have to offer. Do your own research and pick a fund, network or platform suited to your needs.