The risks of EIS and SEIS investing

EIS and SEIS are generous because the underlying activity is genuinely risky. The reliefs are compensation for accepting that risk, not protection from it. Anyone considering these schemes should be able to state the downside plainly before thinking about the upside.

This guide is one part of a set covering the whole scheme. The EIS hub lists every guide, from eligibility to claiming.

Company failure

Early-stage companies fail regularly, and a total loss of the amount invested is a normal outcome rather than a remote one. Loss relief reduces what that costs - as set out in EIS loss relief - but a 45% taxpayer still loses roughly 38% of an EIS investment and around 27% of an SEIS investment in a total failure.

Illiquidity

There is no market in unquoted shares. You cannot sell when you want to, and in practice you should assume the money is committed for five to ten years, not three. A return depends on a trade sale, a secondary transaction or a listing, none of which is in your control.

Loss of tax relief

• The company can breach its qualifying conditions after you have invested, withdrawing your relief.
• You can lose relief by selling early, becoming connected with the company, or receiving value from it.
• Relief is capped by your own income tax liability, which may fall unexpectedly.
• Advance assurance is not a guarantee, and HMRC can challenge a claim later.

Dilution

A company that succeeds usually raises again. Each round issues new shares, and an early holding that is not followed on will own a smaller percentage of a larger business. That is normal and often good, but a down round, or a round with preference terms, can leave early ordinary shareholders with far less than the headline valuation suggests.

Valuation uncertainty

There is no reliable market price for an unquoted early-stage company. Round valuations are negotiated, not observed, and any interim valuation you are shown is an estimate. The only price that finally matters is the one at exit.

Concentration and rule change

• Concentration: a small number of holdings makes the outcome depend on individual companies rather than on the asset class. Most professional investors treat a dozen or more positions as a minimum.
• Sector and vintage: investing everything in one sector, or in one year, concentrates risk in a way diversification across companies alone does not address.
• Rule change: the schemes are set by Parliament, and rates, limits and sunset dates have changed repeatedly.
• Fees: platform, arrangement and performance fees reduce the net return and vary widely.

How investors manage it

Nothing removes these risks. What experienced investors do is size positions so that any single failure is survivable, spread across companies, sectors and tax years, invest only money they will not need, and look closely at who is actually building each business. That last point is why the venture-builder model exists: why invest in venture-built companies sets out the structural risks it addresses, and assessing risk in early-stage companies covers the diligence.