What founders actually give up
Every equity round sells part of the company. Dilution is set by the amount raised relative to the valuation investors accept. That valuation reflects team, traction, market and competition for the deal — not a formula. Founders should model ownership across several future rounds, not just this one, including any option pool investors ask to create before they invest.
Common instruments at early stage
UK AI startups most often use one of these:
- Advance subscription agreements (ASAs): UK-style instruments that convert into shares at the next round, and can be compatible with EIS when structured correctly.
- SAFEs: popular with US investors; SEIS and EIS relief generally cannot be claimed on them, which matters to UK angels.
- Convertible loan notes: debt that converts later, usually with interest, a discount and sometimes a valuation cap.
- Priced equity rounds: shares sold at an agreed valuation, with fuller legal documents.
The AI-specific cost: compute
Model usage, training runs, evaluation and hosting are often the largest non-salary line in an AI plan. Investors will check that your ask covers these realistically. Cloud and model-provider credit programmes can cut early costs, but they expire; plan what happens when they do, and avoid building a business that only works while credits last.
Terms worth understanding before you sign
Headline valuation is only one term. Liquidation preferences decide who gets paid first on a sale; pro-rata rights let investors keep their share in later rounds; board seats and consent rights (reserved matters) shape control. A slightly lower valuation with clean terms can be better than a higher one with heavy preferences.
The hidden costs of raising
Legal fees, accounting clean-up and due diligence all cost money, and a round can take months of founder time away from customers. Keeping a tidy cap table, signed IP assignments and a documented data inventory reduces both legal bills and delays.
Early-stage funding instruments compared
| Instrument | Valuation set now? | UK tax relief | Paperwork |
|---|---|---|---|
| ASA | Usually not | Can be EIS/SEIS compatible | Light |
| SAFE | Usually not (cap may apply) | Generally not eligible | Light |
| Convertible loan note | Usually not (cap may apply) | Not eligible while debt | Moderate |
| Priced equity round | Yes | Eligible if company qualifies | Heaviest |
Questions to prepare before you pitch
- What liquidation preference and participation are you proposing?
- Do you need an option pool created before your investment, and how big?
- Will your investment qualify for SEIS or EIS, and have we applied for advance assurance?
- What consent rights do you expect over hiring, spending or future rounds?
- Will you take up pro-rata in the next round?
How KJ Enterprises evaluates applied ai businesses
KJ Enterprises aims to keep terms simple and proportionate to the stage. For AI companies we look at whether the ask genuinely reflects compute and model costs and whether margins improve as the company grows.
If that describes your company, you can apply for investment. Related reading: the complete funding guide and the step-by-step how-to and machine learning costs and terms.
Frequently asked questions
Are SAFEs eligible for SEIS or EIS?
Generally not. UK founders raising from angels who want tax relief usually use an ASA or a priced round instead; take professional advice on structure.