UK Law and Practice Contributed by: Dylan Doran Kennett, Michael Jacobs, Stephen Newby and Mark Ife, Herbert Smith Freehills LLP
income receipts, if conditions are met to make them “qualifying shares” . EIS shares are qualifying shares for this purpose (and SEIS shares may qualify if they meet the general conditions). Shares held in VCTs are unlikely to be eligible. Venture capital investors are also often keen to ensure that investee companies avail them - selves of reliefs and credits within the UK tax system, such as “full expensing” and “research and development relief” . 4.3 Government Endorsement So far, the UK government’s initiatives have pri - marily involved tax relief. However, the govern - ment is now focused on enhancing the appeal of the UK for the world’s best and fastest-growing companies as a place to be listed, making Lon - don “the global capital for capital” , with a mar- ket offering innovative capital solutions not seen elsewhere. To this end, the government is com - mitted to a comprehensive programme of initia - tives to deliver on various policy goals. These have involved the following. • Motivating pension funds to invest in riskier/ high-growth assets. The Mansion House Compact scheme involves a number of large pension funds and other stakeholders charged with facilitating the deployment of capital into UK high-growth businesses (as direct investments or via funds) to deliver better returns over the long term for UK sav - ers and bring UK pension funds into line with some of their counterparts in other regions, such as Canada and Australia, where they have a larger allocation to high-growth indus - tries. • Providing investment to UK start-ups through British Patient Capital and the British Busi - ness Bank.
• Seeking to regularise the arrangements gov - erning university spin-offs. • Regularly convening the UK venture commu - nity through its involvement in events such as UK Fintech Week and producing research and reports on how to promote the UK ecosystem (eg, the Kalifa Review of UK Fintech), as well as supporting the UK ecosystem at interna - tional conferences. • Exploring further regulatory change to facilitate secondary trading in high-growth companies under a new regulatory frame - work, PISCES (see 6.3 Pre-IPO Liquidity ), to promote intermittent trading venues. • Wholesale reform of the UK public equity capital markets regulatory framework to sup - port increased IPO activity as well as follow- on offers. Founders are generally incentivised if issued shares at the onset of their venture, represent - ing the “sweat equity” associated with an early- stage operation. To ensure there is a longer-term retention plan in place for each founder, vesting provisions are usually built into the articles of association of the company (or, less common - ly, into the shareholders’ agreement, although this is a less optimal place for the provisions for enforceability purposes). Such vesting pro - visions serve as reassurance for investors that founders are incentivised to remain with the ven - ture during the specified time period, by imple - menting a process whereby the value of the equity is earned over time, albeit issued upfront for taxation reasons, in order to potentially ben - efit from Business Asset Disposal Relief. If the founder were to leave prior to their full vesting period, generally (although this is up for negotia - 5. Employment Incentives 5.1 General
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