99% of the companies we see on SeedLegals have just a single company registered on Companies House. Nice and easy.
But, just occasionally we come across founders who've created a multi-level company structure with a holding company (we'll call that TopCo) owning shares in a subsidiary (we'll call that ChildCo).
When we ask why they went with this structure, the most common response is "our accountant suggested we do this" or "to keep the IP in a separate company from the investment".
We think these multi-company structures are almost always a bad idea, done for the wrong reasons, and cause significant problems later. Broadly, they create two main sets of problems:
SEIS/EIS RULES SAY INVESTMENT HAS TO BE IN THE TOPCO
The HMRC rules say that
- SEIS/EIS can only be made into a TopCo (any investment in a ChildCo won't qualify for SEIS/EIS).
- If the company has a subsidiary, it has to be 90%+ owned by the TopCo.
So, that makes it clear - if you created a two-tier company, you have to raise investment in the TopCo if your investors are to get SEIS/EIS. If the goal was to e.g. raise investment in the ChildCo and keep the IP in a holding company, that won't work, at least not if you want to offer SEIS/EIS.
INVESTORS HATE THESE STRUCTURES
When investors make an investment in your company they want to be sure that the entity they're investing in owns all the IP, owns the future revenue stream, owns and controls the product, etc.
The is then that as soon as you have a multi-company structure, your investors are going to look for iron-clad agreements between the companies to ensure that the entity they're investing in will be the one in which the ultimate value exists.
That means they'll want to see:
- IP licensing agreements between the entities.
- Pricing and revenue agreements between the entities to ensure that e.g. the ChildCo doesn't set up a clever transfer pricing regime such that it keeps all the revenue and doesn't send it back to the parent company,
- Agreements that prevent the child company being sold separately to the parent company.
- etc., etc.
Basically, you'll be spending months and many thousands of Pounds on legal fees to satisfy investors' due diligence requirements. At the end of which, you'll have so much extra paperwork for investors to read that all you've really done is make it more difficult for them to invest in your company compared to the 99% of companies that come their way with a simple single-company structure.
So our suggestion is: Keep it simple! Unless there's a really really good reason for multiple companies, going with a single company means you'll spend months more of your life and your money developing your product rather than paying lawyers for cross-license agreements.
If you already have a multi-tier company structure, contact us to discuss the best way forward.