Do you need to convert your SeedFAST but you have not met the set valuation? OR have you not reached your full fundraise amount for your target funding round?
months ago you took your best guess as to what the world, and your next funding round,
would be by your longstop date (normally 6 months). And you now find that things aren't exactly as you had
expected them to be, typically it's one of these scenarios:
- the new round is taking longer than you hoped, so the SeedFASTs will convert ahead of the round - which is fine of course - but the new round valuation will be lower than the longstop valuation in the SeedFAST.
- the new round is happening now, but you've been unable to raise as much as you hoped, and the size of the round falls below the definition of "new Financing Round" in the SeedFAST, so the SeedFAST will not automatically convert in the round.
Separately, the new round valuation may be lower than you planned... which is fine,
you're just raising less at a lower valuation? That shouldn't affect anything in the
SeedFAST, because it will just follow the next round valuation.
So let's take a deeper look at scenario 2. There are three use cases / ways to go:
- Follow the terms set out in the signed agreement: If the SeedFAST says that a new round is "Raising £1M or more" and you're raising less than that, no problem, the SeedFAST simply won't convert then, and it will convert in the future at the longstop date, at whatever the longstop valuation is.
- Modify the terms, to give the SeedFAST investor a better outcome: If the
investor would get a worse outcome by converting later, or at a higher
valuation, and you want to be nice to them, you can ask them if they are happy for you to convert them in this round.
- Modify the terms, the SeedFAST investor will get a worse deal: If, on the other hand, you want to persuade the investor that their SeedFAST will convert now (contrary to the terms in the agreement) then you're going to need to persuade them, nicely, to agree to something that's a worse deal for them than the one they're legally entitled to. To help them with that you might e.g. make them an Advisor and give them some share options for that. Or buy them chocolates. Whatever gets them over the line to agree to be nice.
Important SEIS/EIS note:
If you and the investor jointly agree that the SeedFAST can run longer than the longstop date, remember that HMRC have a rule that an ASA (which is what a SeedFAST is) must have a longstop date of no more than 6 months. If you run over that then there is a risk that HMRC may deem the investment to not qualify for SEIS/EIS... so while we advise you to stick strictly to that, where rounds have run a few weeks past that, we’ve not seen issues here, although this ultimately remains at HMRC's discretion.
The other thing to note is that HMRC requires that, to qualify for SEIS/EIS, an ASA “must not be capable of being varied”. So by agreeing, outside of the SeedFAST, to do something contrary to the agreed terms, you risk the investment not being qualified for SEIS/EIS. Again, we advise sticking with the rules, though we've seen SeedFASTs be varied and S/EIS still awarded. In cases where you make any adjustments, we recommend the Deed of Variation route per the above, making the risk clear to your investors and getting their written consent before you proceed. Ultimately, HMRC's guidance states that the risk is present and that S/EIS relief is awarded at their final discretion.