Most rejection reasons are about the company: what it does, how old the trade is, whether the investment is genuinely risky. This one is about the paperwork, which makes it the most annoying way to fail and the easiest to prevent. The shares themselves have to meet conditions, and a term that looks like ordinary investor protection can take the whole raise outside the scheme.
The condition. The shares must be full-risk ordinary shares, not redeemable, and must carry no special rights to the company's assets. If a term protects the investor from the downside, it is the term to look at.
Why The Share Terms Matter So Much
The schemes exist to push capital towards companies where investors genuinely stand to lose money. That logic runs all the way down into the share class. An investor who is protected against losing their capital is not taking the risk the relief is paying them to take, so the shares stop qualifying.
This is also why it is easy to get wrong. Every instinct in a negotiated funding round is to give the investor protection, and a lawyer drafting without the scheme in mind will reach for exactly the terms that break it.
The Terms That Cause Problems
Redemption rights
The shares must not be redeemable. Any right for the company to buy the shares back, or for the investor to require it, is a problem, and it does not matter whether the right is likely to be used or is a long way in the future. A redemption right sitting in the articles from a previous round can break a new SEIS or EIS issue.
Preferential rights to assets
The shares must carry no special rights to the company's assets. That is aimed squarely at liquidation preferences. A preference that pays the investor out first on a winding up is a special right to assets, and it is the single most common breach, because a 1x preference is so standard in venture terms that nobody thinks of it as unusual.
Preferential dividends
A cumulative dividend, or one whose rate or payment is dependent in a way that gives the investor a preferential return, causes problems. A simple discretionary dividend on ordinary shares does not.
Anything that amounts to downside protection
Guarantees, put options over the shares, arrangements where another party agrees to buy the investor out at a set price, side letters promising a return. These sit outside the articles and are easy to forget about, and they go to the heart of whether the investor's capital is genuinely at risk.
What Is Not A Problem
It is worth being clear about this, because founders sometimes strip out more than they need to and give away terms they did not have to.
- Voting rights. The shares do not have to carry votes, and differences in voting rights are not the issue. The restriction is on rights to assets, not on control.
- An existing founder share class. Having more than one class of share is fine. What matters is the class being issued to the investor.
- Ordinary commercial protections that are not financial preference. Information rights, board observer rights, consent rights over certain decisions. These are about governance, not about protecting the investor's capital.
- Anti-dilution by way of further issues at a lower price is a more complicated area and worth advice, but it is not automatically fatal in the way a liquidation preference is.
Convertibles And Advance Subscription Agreements
A separate trap, and an increasingly common one. SEIS and EIS relief attaches to shares subscribed for in cash and issued. A convertible loan note is debt, and debt does not qualify. Converting it into shares later does not fix the position, because the money went in as a loan.
Advance subscription agreements are the structure used to get round this, but they only work if they are drafted properly: the money must be non-refundable in all circumstances, with no interest, and conversion must happen within a limited period. An ASA that allows the money back in any scenario is a loan in substance, and the relief goes with it.
If you have already taken money in on a convertible, that is worth raising before you apply rather than after.
The Checks To Run Before You Apply
- Read the current articles, not the template you started from. Amendments from an earlier round are where redemption and preference terms hide.
- Read the shareholders' agreement and any side letters for anything that protects the investor's return.
- Check the term sheet against the articles. HMRC sees both. A liquidation preference agreed in the term sheet but not yet in the articles is still a problem, because the application has to describe the investment that is actually proposed.
- Check what any earlier money came in as. Loans, convertibles and ASAs all need looking at.
- If a preference has to go, amend before applying. HMRC assesses the proposed share issue as described, so fixing it afterwards means a fresh application.
Getting this wrong is particularly frustrating because the company itself usually qualifies. The trade is fine, the age is fine, the risk is real, and the application fails on a clause. Our guide to the documents HMRC wants covers what gets submitted alongside them.
Common Questions
Full-risk ordinary shares that are not redeemable and carry no special rights to the company's assets. The point of the condition is that the investor's capital has to be genuinely at risk, so terms that protect the downside take the shares outside the scheme.
Yes. A preference that pays the investor out ahead of others on a winding up is a special right to the company's assets, which the shares must not carry. It is the most common breach, because a 1x preference is standard in venture terms and does not feel unusual.
Yes. The restriction is on rights to the company's assets and on redemption, not on votes. Shares without voting rights can still qualify, so you do not need to give away control to meet the condition.
No. Relief attaches to shares subscribed for in cash and issued, and a convertible loan note is debt. Converting it into shares later does not fix it, because the money went in as a loan. An advance subscription agreement is the usual alternative, but only if the money is non-refundable in all circumstances, carries no interest and converts within a limited period.
You can amend them, but HMRC assesses the share issue as described in the application, so a change usually means a fresh application rather than a correction to the existing one. It is much cheaper to have the articles and investment documents reviewed before you apply.
No. Having founder shares and an investor class is normal and fine. What matters is the terms of the class actually being issued to the SEIS or EIS investor.
Want your share terms checked before you apply?
We handle SEIS and EIS advance assurance and compliance on a fixed fee, and reviewing the articles and investment documents is part of it. It is a much cheaper problem to find before the application than after.
Book a free callChecked against HMRC guidance on gov.uk on 21 September 2026. Share terms and their treatment depend on the actual drafting in your own documents, and this is general information rather than advice on them. Have the articles and investment agreement reviewed before you apply.