An equity investment is money paid for shares in a company: the investor becomes a part-owner, with no right to repayment, and earns a return through dividends and an increase in the value of the shares. For the company it is funding with no interest or repayments, at the cost of diluting the existing owners. In 2026/27, investors in qualifying early-stage companies can get 50% income tax relief under SEIS or 30% under EIS.
Equity investment from both sides
| Point | Company raising money | Investor |
|---|---|---|
| What changes hands | Issues new shares for cash | Pays cash for shares |
| Return | No interest; dividends only if declared | Dividends plus any gain on sale |
| Risk | Owners give up part of future value and control | Ranks last on insolvency; can lose everything |
| Tax | Dividends are not deductible for Corporation Tax | Dividend tax on income; Capital Gains Tax on a sale, unless a relief applies |
Equity suits businesses that cannot yet support loan repayments, typically early-stage companies or those investing ahead of revenue. Our guide to private equity and venture capital explains how the professional investors differ.
Valuation and dilution
Every equity round starts with a price. The pre-money valuation is what the company is worth before the new money; the post-money valuation adds the cash raised. The investor's stake is the investment divided by the post-money valuation.
Valuations for early-stage companies rest on forecasts, comparable deals and negotiation rather than on a formula. Later-stage businesses are more often valued on a multiple of earnings or on discounted cash flows. Our guide to enterprise value and equity value shows how net debt is deducted to reach the value of the shares.
Worked example: a seed round
Two founders own 100% of a company with 1,000 shares. An investor agrees to put in £500,000 at a pre-money valuation of £2 million.
- Post-money valuation. £2,000,000 + £500,000 = £2,500,000;
- Investor's stake. £500,000 ÷ £2,500,000 = 20%;
- New shares. The price per share is £2,000,000 ÷ 1,000 = £2,000, so the company issues 250 new shares, taking the total to 1,250;
- Dilution. The founders now own 80%, but of a company worth £2.5 million, so their stake is still valued at £2 million.
If the investor qualifies for EIS, 30% relief reduces their income tax bill by £150,000, provided they have that much income tax to relieve and hold the shares for at least 3 years. Under SEIS the relief would be 50%, but SEIS caps each investor at £200,000 a year and each company at £250,000 in total, so this round would have to be split.
Share classes and investor rights
- Ordinary shares. The usual class, carrying votes, dividends and a share of what is left on a winding up;
- Preference shares. A priority right to a fixed dividend or to capital. If they are mandatorily redeemable, the company has a contractual obligation to pay and they are accounted for as a liability, not equity;
- Non-voting or alphabet shares. Separate classes so that dividends can be declared on one class and not another, or votes kept with the founders;
- Investor protections. Set out in the articles and a shareholders' agreement, such as consent rights over major decisions, anti-dilution terms and drag and tag rights on a sale.
Structure matters for tax relief. SEIS and EIS shares must be "full risk ordinary shares": they may carry limited preferential rights to dividends, but no preferential right to assets on a winding up and no right to be redeemed. A liquidation preference of the kind common in venture deals rules out the relief. Our guide to convertible loan notes explains why money advanced on a loan note does not attract EIS relief when it converts into shares.
Company law steps when issuing shares
- Authority to allot. Directors of a private company with only one class of shares can allot shares of that class unless the articles prohibit it; otherwise they need authority from the articles or an ordinary resolution;
- Pre-emption rights. New equity securities must first be offered to existing ordinary shareholders in proportion to their holdings. A private company can exclude this in its articles, or the shareholders can disapply it by special resolution;
- Return of allotment. The company must deliver a return of the allotment to Companies House (form SH01) within one month of allotting the shares, and update its register of members.
Tax for equity investors in 2026/27
| Relief | SEIS | EIS |
|---|---|---|
| Income tax relief | 50% | 30% |
| Annual investment limit | £200,000 | £1 million (£2 million with at least £1 million in knowledge-intensive companies) |
| Company raise limit | £250,000 in total | £10 million in 12 months; £24 million lifetime (most companies) |
| Minimum holding period | 3 years | 3 years |
Outside the schemes, dividends are taxed at 10.75%, 35.75% or 39.35% above the £500 dividend allowance, and gains on shares at 18% within the basic rate band and 24% above it, after the £3,000 annual exempt amount. Income tax relief is not available if the investor and associates hold more than 30% of the company.
Budget 2026 announced two changes from 6 April 2027 that affect equity holders: a new Capital Gains Tax Founders' Relief at 10% on up to £10 million of lifetime gains for qualifying founders of high-growth companies, and a cut in the Business Asset Disposal Relief lifetime limit from £1 million to £500,000. It also announced technical changes to SEIS, EIS and VCTs in Finance Bill 2026-27. None of these is law yet. Our guide to EIS tax relief covers the investor rules in detail.
Primary sources: venture capital scheme reliefs for investors, the EIS and SEIS company rules, ITA 2007 s173, Companies Act 2006 ss550, 555, 561, 567 and 571, CFM21120, GOV.UK on Capital Gains Tax and dividend tax, and Budget 2026.
Before a round, our EIS and SEIS advisers can secure advance assurance and check the share terms, and our valuations team can support the price you negotiate.