The maths investors do: returns, dilution, preferences and SEIS/EIS

Investors do a few quick sums before they answer and rarely show the working. Here it is, with a calculator for each.

The reality: one deal pays for the fund

A venture capital (VC) fund must return its limited partners' (LPs') money with a profit about ten years on, and the best funds lose money on more deals than merely good ones¹.

"Return the fund": the exit a VC has to believe in

The exit needed is fund size ÷ the fund's stake at exit⁶. Illustrative: a £50m fund expecting 10% at exit needs £50m ÷ 10% = a £500m exit. Seed funds target 3x to 5x gross⁶; funds typically charge a 2% annual fee and keep 20% of the profit, the "carry"². If the £50m fund has promised its LPs 3x net:

• Fees £50m × 2% × 10 years = £10m, so £40m is invested.
• LPs need 3 × £50m = £150m: capital plus 80% of profit, £50m + 0.8 × (G − £50m) = £150m, so G = £175m gross, 3.5x committed capital and 4.375x the £40m invested.
• One company at 10%: £175m ÷ 10% = a £1.75bn exit.

Simplified terms (no hurdle, flat fees, carry on profit over committed capital). Later rounds shrink the stake unless the fund follows on, so the real exit needed is larger⁷.

Angels want "an exit plan", not founders who "remain in control and have a lifestyle job" (UKBAA)⁸. A VC no is usually about fit; guides/investors maps who funds what.

Valuation: pre-money, post-money and the UK norm

Post-money = pre-money + investment; stake = investment ÷ post-money. £500,000 at £2,000,000 pre-money: post-money £2,500,000, stake 20%.

Beauhurst's H1 2026 median seed-stage pre-money is £2.0m, up 13%⁴. SeedLegals' ranges are its own customers' deals¹³⁵.

Paul Graham ranks valuation "at best third" in importance and suggests selling no more than about 25% in the larger round after a first small raise¹⁵.

We are raising £500,000 at a £2,000,000 pre-money valuation
(£2,500,000 post-money), selling 20%.
That funds 15 months to [milestone: first £X of recurring revenue /
regulatory approval / pilot results], which is where the next round
prices from.
SEIS advance assurance is in place for the first £250,000.

Dilution: what you will own after three rounds

Each round sells a slice of the whole company, so every earlier holder is multiplied down.

Everyone else, multiplied down the same way (seed investor 20% × 0.9 × 0.8 × 0.85 = 12.24%):

The option pool shuffle

Without the pool, founders keep 0.8 × 0.8 × 0.85 = 54.4%. The pool costs them 5.44 points and the Series A investor nothing, because a pre-money pool dilutes only existing holders. Negotiate pool size and pre-money together, and size the pool to named hires before the next round.

US data only (no UK medians found): founders "sell 20% at seed and 20% at Series A" (Carta)¹⁶, and median founding-team ownership is 56.2% after a priced seed and 36.1% after Series A¹⁷.

Multiple versus IRR: why they keep asking when you will exit

The multiple on invested capital (MOIC) is money out ÷ money in. The internal rate of return (IRR) is the annual compound rate behind it: with one cash-in and one cash-out, IRR = MOIC^(1 ÷ years) − 1.

A 2x in five years beats a 3x in ten. Beauhurst's median time from funding to exit is four years⁴; the old UK angel data averaged 22% IRR over about four years³.

Liquidation preferences: who gets what when the exit is modest

A liquidation preference decides who is paid first in a sale or winding up. A 1x non-participating preference gives the investor the greater of its money back or its pro-rata share; a participating preference takes its money back and a share of the rest¹⁸¹⁹. Illustrative: £2m paid for 20%.

Indifference point = investment ÷ ownership = £2m ÷ 20% = £10m: below it the preference pays, above it the investor converts. Multiple preferences can pay "twice or three times the amount they invested"¹³. SeedLegals' advice: "just make sure it's a 1x non-participating preference"; "traditional preference shares can conflict with SEIS/EIS rules", but "Investors can get ordinary shares with a liquidation preference"²⁰. Test a realistic exit, not the deck's:

ASAs: what the cap and the discount convert into

An advance subscription agreement (ASA; SeedLegals' SeedFAST) is the UK equivalent of the US SAFE: the investor pays now and gets shares at the next priced round, sometimes at a discount or under a valuation cap, always by a longstop date. "UK companies are now raising more outside a round than in a funding round" (SeedLegals)²¹, and founders can give away more equity on conversion than they meant to²².

The cap, not the discount, set the price: you sold £200,000 of shares for £100,000, and the better the round, the more a cap costs. Here ASA shares are left out of the pre-money share count; many term sheets include them, moving all the ASA dilution onto founders. Ask which applies.

SEIS rules (HMRC VCM33025). The payment cannot be refunded "under any circumstances"; the ASA cannot be varied, cancelled or assigned, bears no interest and has a longstop date. "HMRC expects a longstop date to be no more than 6 months from the date the ASA is entered into"; apply for advance assurance before signing²³. SeedLegals applies the same six months to EIS²¹. Shares must be issued within six months of both signing and payment; the gross-assets tests (£350,000 SEIS, £30m EIS) apply on the issue date²².

UK market terms, from SeedLegals' data on 28,000 SeedFASTs, 2018 to 2025²⁴:

SEIS and EIS at October 2026: the relief that changes an angel's sums

The Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS) give UK taxpayers income tax relief on new shares, loss relief and no capital gains tax (CGT) on gains; venture capital trusts (VCTs) are listed funds. From 6 April 2026 the EIS company limits doubled and VCT relief fell to 20%; SEIS is unchanged since April 2023^26272829.

The EIS and VCT sunset date stays at 6 April 2035; Social Investment Tax Relief is closed to investments made on or after 6 April 2023²⁸²⁹. CGT from 6 April 2026: 24% for higher and additional rate taxpayers, 18% within the basic rate band³⁰.

What the investor actually risks

Loss relief sets "a loss on sale, less any Income Tax relief already given" against income in that year or the year before, at the investor's marginal rate²⁸. A £10,000 investment that fails completely:

If a gain was reinvested, SEIS reinvestment relief exempts 50% of the amount invested (£5,000 of gain), worth £5,000 × 24% = £1,200, cutting the 45% taxpayer's net loss to £1,550²⁸³⁰. Assumes enough tax liability, a three-year hold and rUK rates (Scottish bands differ).

Knowledge-intensive companies: the longer window

A knowledge-intensive company (KIC) must have fewer than 500 FTE staff instead of 250, has 10 years from first commercial sale instead of 7 (or, for investments since 6 April 2018, from when turnover first reached £200,000) and gets the higher limits above³¹³²²⁷. It must meet an operating-costs condition and either the innovation or the skilled-employees condition (VCM8162, updated 30 July 2026)³¹.

Plan the evidence with an adviser before applying; spin-outs, see guides/research-to-company.

Advance assurance: get it before you ask for money

Advance assurance is HMRC's optional opinion on whether a proposed investment would qualify: "You can use this to show potential investors that an investment may qualify". Send the amount, business plan and forecasts, accounts, articles, register of members and investor documents, and name potential investors if this is your first scheme. HMRC publishes no timescale (GOV.UK, updated 18 December 2024)³⁶.

SeedLegals: name an investor committed in theory to 25% or more of a first raise; HMRC "wants to see the risks to your business and its likelihood to fail"; "any mistakes mean you have to reapply"³⁷. It "can take up to six weeks"³⁸ and has no fixed expiry, though it can lapse³⁹.

Revenue-based finance and loans: the honest annual rate

Revenue-based finance (RBF) is an advance repaid as a share of revenue until a fixed cap is reached: a 1.35x cap on £100,000 means £135,000 repaid (the sources are lenders and brokers)⁴⁰. Worked example: £100,000 at a 1.2x cap, £120,000 repaid in equal monthly instalments.

A UK broker's page reportedly puts 1.2x over six months at "approximately 40% APR" and over 18 months at "approximately 13%"⁴⁰. That is 20% ÷ 0.5 years, as if you kept all £100,000 for six months; you hand back £20,000 a month, so the true rate is 65.7%; faster repayment means a higher rate. Get the APR on your own repayment profile in writing.

A Start Up Loan is £500 to £25,000 at a fixed 7.5% a year over one to five years, with up to 12 months of free mentoring. It is "an unsecured personal loan" (yours, with a credit check) for UK residents aged 18 or over whose business has been fully trading for under five years; older material quoting 6% is out of date⁴¹.

• £25,000 at 7.5% over 5 years: £500.95 a month, £30,056.92 in total, £5,056.92 of it interest.
• An illustrative £250,000 loan at 10% over 5 years: £5,311.76 a month, £318,705.67 in total.

The six-month advance costs nearly nine times the Start Up Loan rate (65.7% ÷ 7.5% = 8.8); RBF earns its place on speed and no dilution, not price.

What this means for you: three sums before you pitch

Can this business produce the exit this investor needs? What will you own after two more rounds? What does each ASA really cost at its cap? If your honest ceiling is a £5m to £20m trade sale, you are an angel, loan, RBF or grant company: say so in the first meeting. Fill this in first:

Raise: £___ at £___ pre-money (£___ post-money), selling __%
Runway: __ months to [milestone the next round will price from]
Fund fit: your fund is £__m; at a __% stake at exit you need a
  £__m exit from us; our route is [buyer type / comparable / year]
Dilution: after this round and the next, founders hold __%
  (option pool of __% included)
Exit: [year], [route], implying __x and __% IRR on this round
Terms: 1x non-participating preference at most; pool sized to the
  hiring plan; any ASA with a 6-month longstop
SEIS/EIS: advance assurance reference ___, dated ___;
  KIC status: [yes / no / not needed]

The numbers need a business behind them: guides/prove-the-business and guides/team.

Pitfalls

• Pitching a fund you cannot return. The most common no, and the least personal.
• Mixing up pre- and post-money, or agreeing the valuation before the option pool (5.44 points in the example, paid by founders alone).
• Under 12 months of runway, US valuations, or a 30% ask⁵; angels cannot hold more than 30% under SEIS or EIS¹⁴.
• Participating or 2x to 3x preferences, or anti-dilution at seed, which SeedLegals calls "quite an aggressive action"¹³.
• An ASA with a 12-month longstop (HMRC is unlikely to give assurance) or a cap you have not converted on paper (it can sell twice the shares you expected).
• Writing the HMRC business plan as a pitch deck. It wants the risks³⁷.
• Treating a "20% fee" as a 20% rate, or forgetting a Start Up Loan is personal⁴¹.
• Tranched investment, which leaves companies "living hand to mouth"⁴².

Checklist

• Each target fund's size, likely stake at exit, and the exit that returns it
• An exit story (buyer type, comparable, year) that fund could believe, or non-VC money instead
• Pre-money, post-money and percentage sold in one sentence, and they agree
• 12 to 18 months of runway to a milestone the next round can price from
• Cap table modelled through two more rounds, pool sized to named hires
• The deck's multiple converted to an IRR; any preference 1x non-participating
• Every ASA: six-month longstop, no interest, no refund, converted at discount and cap, pre-money convention confirmed
• Advance assurance applied for four to six weeks before the round, written as a risk document
• SEIS tests (£250,000, gross assets £350,000, under 25 staff, trade under three years) and EIS limits checked at October 2026; KIC tests with an adviser if deep tech
• RBF: APR on my repayment profile in writing; loans: monthly payment, total interest, personal or not

Questions

What does "return the fund" mean in venture capital?

One investment paying back the whole fund: fund size divided by the fund's stake at exit. A £50m fund owning 10% needs a £500m exit to return the fund once, and £1.75bn to deliver 3x net after 2% fees and 20% carry from that one company.

How much equity do UK startups give away in a seed round?

SeedLegals' platform data says 10% to 20%, an average of 14%; UKBAA says 15% to 30%. Angels cannot hold more than 30% and claim SEIS or EIS relief. Beauhurst's median seed-stage pre-money in H1 2026 was £2.0m.

What is the option pool shuffle?

Creating the employee option pool before the investor's money goes in, so only existing shareholders pay for it. In the worked example a 10% pool leaves founders 48.96% after Series B instead of 54.4%.

What is a 1x non-participating liquidation preference?

The investor gets the greater of its money back or its pro-rata share. £2m for 20% takes £2m from a £5m or £10m exit and £6m from a £30m exit; a participating preference would take £2.6m, £3.6m and £7.6m.

How does SEIS loss relief work for an investor?

After 50% income tax relief, a £10,000 SEIS investment costs £5,000. If the company fails, that £5,000 is set against income: £2,250 back for a 45% taxpayer, a net loss of £2,750 (27.5%). Under EIS, with 30% relief, the worst case is £3,850 (38.5%).

Is revenue-based finance cheaper than a bank loan?

Rarely. A £100,000 advance with a 1.2x cap repaid over six months is 65.7% nominal APR (89.5% effective), over 12 months 35.1%, over 18 months 23.9%; a Start Up Loan is a fixed 7.5%. Lower broker figures ignore that you repay principal monthly.

Written for businesses, founders and researchers in the North West of England and checked against the sources listed above on 18 October 2026. Funders change their rules, so always read the current call before you apply. Spotted something out of date? Tell us.