Early-stage companies are among the riskiest investments a private investor can hold. Most fail, the shares are hard to sell, and any return usually depends on a sale or stock market listing years away. UK tax reliefs reduce the cost of a loss but do not change the odds, and the FCA’s rules on promoting these investments start from the assumption that you could lose everything.
How often early-stage companies fail
The FCA’s prescribed risk summary for shares in unlisted businesses puts it in four words: “Most start-up businesses fail” (FCA Handbook, COBS 4 Annex 1). The broadest UK measure comes from the Office for National Statistics. Of businesses born in 2019, 38.4% were still active five years later, in 2024. Survival ranged from 43.5% in the South West to 30.6% in the West Midlands (ONS, 20 November 2025).
That figure covers every new UK business, not only those raising money from outside investors, so it is a base rate rather than a measure of start-up investing. It still shows the shape of the problem: most of a typical cohort disappears within five years. An investor who backs one company is exposed to that single outcome, which is why the FCA’s warnings stress spreading money and limiting the total.
Dilution
Young companies usually need several rounds of funding, and each new issue of shares shrinks the percentage owned by existing holders. The FCA’s risk summary notes that “Most start-up businesses issue multiple rounds of shares”, and that new shares may carry rights yours do not, such as a fixed dividend, which can further reduce your chance of a return.
A simple illustration: if you own 1% of a company and it issues new shares equal to a quarter of its enlarged share capital, your stake falls to 0.75%. Whether that leaves you better or worse off depends on the price of the new shares and on how much the business grows. Convertible loan notes and advance subscription agreements, which turn into shares at a later round, add another layer; our explainer on CLNs and ASAs covers them.
Illiquidity
There is usually no market for shares in a private company. The FCA warns that you are unlikely to be able to sell early, that the most likely way to get your money back is if the business is bought or lists its shares, and that “These events are not common”. Start-ups rarely pay dividends, it adds. Tax rules add lock-ins of their own: SEIS and EIS shares must be held for at least three years to keep the reliefs, and VCT shares for five (HMRC).
Routes in
Angel networks and syndicates
Angel networks and syndicates group private investors to review companies and invest alongside one another. The investment is usually made directly into the company, so SEIS or EIS relief is available only if the company, the share issue and the investor all meet the scheme conditions. Due diligence falls largely on you; our due diligence guide sets out what to check.
Crowdfunding platforms
Investment-based crowdfunding platforms let the public buy shares or business-backed loans in small and medium-sized companies online. The FCA regulates investment-based crowdfunding, but it warns that you “might lose all the money you have invested”, may not be able to get your money back quickly or at all, and will not have access to the Financial Services Compensation Scheme (FCA). The rules on how platforms may promote these offers are set out below.
SEIS and EIS funds
Fund managers run portfolios that invest in several SEIS or EIS companies on investors’ behalf. HMRC also recognises approved funds that invest in knowledge-intensive companies: the manager receives the companies’ EIS3 certificates and sends investors a single form EIS5 to claim (HMRC). Outside that route, relief still depends on a compliance certificate for each underlying company, so it arrives as the money is invested. Our sister title SEIS Investments compares funds and direct investment.
Venture capital trusts
A VCT is a company, like an investment trust, approved by HMRC to invest in or lend to unlisted companies. Newly issued VCT shares earn income tax relief of 20% on up to £200,000 a year, cut from 30% on 6 April 2026, provided you hold them for five years; dividends are free of income tax and gains free of capital gains tax (HMRC; HMRC policy paper). A VCT holds stakes in a number of unlisted companies, so one failure matters less, but the underlying businesses carry the same kinds of risk.
The tax reliefs
The three schemes for individuals, as set out in HMRC’s guidance for investors for 2026 to 2027:
| Scheme | Income tax relief | Maximum investment per tax year | Minimum holding to keep relief | Gains when you sell | Loss relief against income |
|---|---|---|---|---|---|
| SEIS | 50% | £200,000 | Three years | Free of capital gains tax if income tax relief is kept | Yes |
| EIS | 30% | £1m, or £2m if at least £1m goes into knowledge-intensive companies | Three years | Free of capital gains tax if income tax relief is kept; gains can also be deferred | Yes |
| VCT (new shares) | 20% from 6 April 2026 | £200,000 | Five years | Free of capital gains tax; dividends free of income tax | No |
Relief only reduces income tax you actually owe and cannot be carried forward, though SEIS and EIS relief can be treated as made in the previous tax year. SEIS also offers capital gains tax relief when you reinvest a gain in SEIS shares, on 50% of the investment up to a maximum of £100,000. You cannot claim SEIS or EIS income tax relief if you and your associates hold more than 30% of the company or you are an employee, though directors can qualify for SEIS. Our SEIS, EIS and VCT comparison and SEIS for investors go into the detail.
The FCA’s rules for crowdfunding
Unlisted shares and debt securities offered through crowdfunding are, in FCA terms, non-readily realisable securities, one type of “restricted mass market investment”. The current regime came in with the FCA’s policy statement PS22/10, with risk warning rules applying from 1 December 2022 and the rest from 1 February 2023 (FCA). Before a firm can show you a direct offer to invest, it must (FCA Handbook, COBS 4.12A):
- if you have not had a direct offer from that firm before, make you wait at least 24 hours after you ask to see it and show you a risk warning that includes your name;
- categorise you as a certified high net worth investor, a certified or self-certified sophisticated investor, or a restricted investor, based on a statement signed within the past 12 months;
- assess whether the investment is appropriate for you before taking your order.
The high net worth statement asks whether, in the last financial year, you had income of £100,000 or more, or net assets of £250,000 or more excluding your home, pension and rights under qualifying insurance (COBS 4 Annex 2). The restricted investor statement asks you to confirm that you invested less than 10% of your net assets in high-risk investments over the past 12 months and intend to stay below 10% over the next 12 (COBS 4 Annex 5). Promotions of unlisted shares must carry the FCA’s warning: “Don’t invest unless you’re prepared to lose all the money you invest. This is a high-risk investment and you are unlikely to be protected if something goes wrong.”
Sizing your exposure
TID does not make personal recommendations, but the regulator’s own benchmarks are a useful yardstick. The FCA’s risk summary calls it “a good rule of thumb” not to invest more than 10% of your money in high-risk investments, and its restricted investor statement uses 10% of net assets, excluding your home and pension. It also warns against putting all your money into a single business. Beyond that, four points help frame the decision:
- Assume a total loss is possible on each company, and size each amount on that basis.
- Expect the money to be tied up for years, beyond the three-year SEIS and EIS holding period.
- Treat tax relief as a cushion, not a return. It reduces the cost of a loss but cannot make a failing company succeed.
- Check the firm you deal with on the FCA’s Financial Services Register before you invest.
Our sister title sets out the risks of SEIS in more depth. If you are unsure whether early-stage investing fits your circumstances, use a regulated adviser.
