How to Raise Before a Funding Round in the UK

If you have found an investor who wants to back your startup but you are not ready for a full funding round, you still have options. An advance subscription agreement UK founders commonly use, known as an ASA, and convertible loan notes let you accept investment today and convert it into equity later. Raising before a priced round is a well-established route for early-stage UK companies, but it requires careful planning. You need to pick the right instrument, set fair terms, check tax relief eligibility, and get your company structure in order before approaching investors. This guide walks you through each step so you can raise with confidence.

Step 1: Decide Whether an Advance Subscription Agreement or Convertible Loan Note Is Right for You

Before you raise a penny, you need to choose the instrument that fits your situation. The two main options are an advance subscription agreement (ASA) and a convertible loan note (CLN). Both let investors put money in now and receive shares later, but they work differently.

An ASA is an equity instrument. The investor subscribes for shares in advance, so no debt sits on your balance sheet and no interest accrues. A CLN is classified as debt. The investor lends money to your company, interest builds up over the life of the note, and the loan converts into shares when a trigger event occurs.

For most UK angel investments at pre-seed or seed stage, an ASA is the simpler and more common choice. It keeps your balance sheet clean and aligns well with SEIS and EIS requirements. A CLN may suit more complex raises, international investors, or situations where the investor requires interest on their capital.

Here is how the two instruments compare on the points that matter most:
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Step 2: Negotiate the Key Deal Terms

Once you have chosen your instrument, you need to agree the commercial terms with your investor. Three terms shape the economics of every pre-round raise.

Discount rate. This is the percentage reduction the early investor gets on the share price when the investment converts. Discounts typically range from 10% to 30%. For example, if new investors in your next round pay £1 per share and the discount is 20%, your early investor converts at £0.80 per share.

Valuation cap. A ceiling on the company valuation used at conversion. If your company is valued above the cap at the next round, the early investor's shares convert at the capped valuation, giving them a larger equity stake. This protects the investor if your company grows significantly before the priced round.

Long-stop date. The deadline by which a qualifying funding round must happen. If no round takes place by this date, fallback provisions kick in. For an ASA, shares may be issued at a pre-agreed valuation. For a CLN, the investor may be able to request repayment of the loan plus accrued interest.

Agree these terms clearly upfront. Ambiguity here leads to disputes later.

Step 3: Confirm SEIS and EIS Eligibility

For many UK angel investors, SEIS and EIS tax relief is a deciding factor. SEIS offers up to 50% income tax relief and EIS up to 30%, making these schemes a strong incentive for investors to back early-stage companies.

An advance subscription agreement UK founders use can be structured to qualify for SEIS and EIS, but it is not automatic. The critical requirement relates to the timing of share issuance after the investment is made. HMRC sets out the specific conditions for eligibility, and your agreement must address these explicitly.

Author's tip: Do not assume your ASA is automatically SEIS or EIS compatible. Check the specific HMRC requirements for the scheme your investor plans to claim under, and build the conversion timeline around those conditions. Getting this wrong can cost your investor thousands in lost tax relief.

If you are using a CLN, remember that SEIS and EIS relief applies to share subscriptions, not loans. Tax relief typically only kicks in after the loan converts into shares, so the timing and structure of the conversion must meet HMRC conditions.

Step 4: Get Your Company Structure in Order

Investors will expect your company to be properly set up before they commit. At a minimum, you need a UK limited company with a registered office address, up-to-date filings at Companies House, and articles of association that support the share classes you plan to issue on conversion.

If you are based outside the UK, both ASAs and convertible loan notes are still available to you. Non-resident founders can use an advance subscription agreement to accept investment from UK angels, and investors can still claim SEIS or EIS relief as long as the company meets the eligibility criteria. You may need additional documentation, such as proof of a UK registered office address or evidence of UK trading activity.

If you are an overseas founder setting up a UK company to raise investment, the Non-Residents Package brings together company formation, a registered office, and essential compliance documents in one step.

Step 5: Execute the Agreement and Accept the Investment

With terms agreed, eligibility confirmed, and your company structure in place, you are ready to sign. Have the agreement reviewed by a solicitor familiar with early-stage investment. Make sure the document covers the discount rate, valuation cap, long-stop date, qualifying round definition, and fallback provisions.

Once signed, the investor transfers the funds. No shares are issued at this point. The shares will be issued later when the qualifying round takes place, or when the fallback provisions in the agreement are triggered.

Keep clear records of the agreement and the funds received. You will need these when you complete your next round and when your investor applies for SEIS or EIS relief.

Conclusion

Raising before a priced round is a practical way to bring investment into your startup when you are not ready to set a valuation. Choose the right instrument for your situation, negotiate fair terms, confirm tax relief eligibility, and make sure your company structure is investor-ready. If you need help forming a UK company or putting the right structure in place, Company Formation packages can help you get started.

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