Most businesses need private equity invested in the business either to get started or to fund expansion and growth.
The type of investment that a business needs and the kinds of equity that will be on offer, will depend in large part on its stage of development.
Founders, Family and Friends
New businesses depend on the hard work and commitment of their founders to get them up and running but many also need financial investments from the founders themselves. Indeed, outside investors and lenders look for such evidence of entrepreneurs’ commitment and belief in their ventures.
Start-ups also often obtain equity financing from founders’ family and friends, even in the planning or feasibility phase. While much of this financing is often informally agreed and provided, businesses and investors alike need:
- A clear understanding of what the business will do with the equity invested, as well as any plans for dividends or returns on equity invested
- Agreement on the role of investors in the strategic or day-to-day management of the business
- An appreciation that businesses can fail and the value of investments may be eroded or lost
- An exit strategy i.e. a plan or framework which will govern how investors may cash out of an investment, for example, if the business grows significantly or finds new investors
Tax Incentive Schemes
The Employment and Investment Incentive (EII) and the Seed Capital Scheme (SCS) are tax incentive schemes designed to encourage investment in businesses.
The EII, which replaced the Business Expansion Scheme (BES) in 2012, provides tax relief for investors in companies involved in certain corporate trades, while the SCS provides for a refund of income tax already paid by an individual, when that individual sets up, and takes employment in, a new qualifying business. Both schemes qualify as State aid and are subject to certain restrictions.
The SCS is intended for those who are or were in PAYE type employment. To be eligible, the entrepreneur must enter into a full-time employment contract for at least one year with the company as an employee or a director and he or she must acquire at least 15% of the issued share capital of the company.
The EII allows a qualifying individual who makes a qualifying investment (up to a maximum €150,000 for any one year) in a qualifying company to avail of income tax relief. The investor can initially avail of income tax relief of 30% on the cost of the investment from their total income in the year of the investment. If, after a three-year holding period, the company has increased either its number of employees or its expenditure on research and development, a further relief of 11% of the cost of the investment will be allowed, taking the total relief to 41%. The relief may be carried forward to future years if the investor cannot take the full deduction to which they are entitled in any one year. The relief is currently scheduled to end in 2013.
Both schemes apply only to certain qualifying trading operations and some of these must be certified by relevant development agencies or government departments. Full details relating to the investment, the company and the qualifying activities of the company are available on Revenue’s website.
Business angels are private individuals who invest relatively small amounts of money in new businesses in return for a share in a start-up or early stage business, and also contribute their expertise in business management and their personal network of contacts. They may invest on an individual basis or as part of business angel syndicates.
Individual business angels typically invest between €20,000 and €250,000, according to the EBAN, the European trade association for business angels, seed funds and other early stage investors.
Two organisations in Ireland seek to match business angels with businesses needing investment: the Halo Business Angel Partnership is a joint initiative between Enterprise Ireland, InterTradeIreland and the Irish Business and Innovation Centres, which is managed by Dublin Business Innovation Centre Limited; the Halo Business Angel Network (HBAN) is a joint initiative of Enterprise Ireland, and InterTradeIreland, which is aimed at developing angel investor syndicates across the island of Ireland.
Venture capital is private equity provided by professional investment firms. Venture capital firms generally look for opportunities to invest in early stage or expanding businesses with high growth potential. As with other types of private equity, venture capital is provided with the expectation of a profitable return on the investment when it is sold either through public flotation, trade sale or buyback by the business.
As with business angels, venture capital firms may bring both funds to invest as well as business expertise and contacts.
They provide equity for seed (research and development prior to active trading), start-up (the early months or years of trading) and other early stage businesses as well as businesses seeking major expansion or significant research and development initiatives. They also finance acquisitions or management buyouts of existing businesses as well as turnaround or revitalisation plans.
Enterprise Ireland aims to develop the venture capital market and improving access to finance by supporting some venture capital funds and assists companies by in making contact with venture capital firms. Under the 2007-2012 Seed and Venture Capital Scheme, Enterprise Ireland committed to invest €175 million in seed and venture capital funds on behalf of the State. By the end of 2010, nine new funds were launched with €152 million committed by Enterprise Ireland, while Enterprise Ireland has committed some €166 million under previous programmes since 1994.
For more details on venture capital, visit the website of the Irish Venture Capital Association (IVCA).