Reserves are the capital an angel sets aside at the outset to back companies a second or third time, rather than spending everything on first cheques. The money kept back is sometimes called dry powder. It is, in a sense, a decision not to invest yet - and for serious early-stage investors it is one of the most consequential decisions in the whole programme.
Here's the trap it guards against. A new angel decides to back ten companies with, say, £50,000 in total. The obvious move is ten cheques of £5,000 and a portfolio assembled in a year. Tidy. Except that eighteen months in, two of those ten are clearly working, raising again at a higher price, and offering existing backers room in the round. The angel has nothing left. The capital is gone, spread evenly across ten names, eight of which will go nowhere. The two that are working get backed by someone else.
That is the problem reserves solve. You hold money back precisely so that you can lean into the handful of companies that earn the right to more.
Spreading every pound across first cheques feels like diversification. It's often just running out of money before the winners ask for it.
What are reserves, and why hold them?
The logic comes straight from how early-stage returns are distributed. They don't cluster around an average; they follow a power law, where a small number of investments return almost everything and the rest return little or nothing. If that's the shape of the outcome, then the ability to put more money into the few that are working is not a nice-to-have. It's where a meaningful slice of the eventual return lives.
Reserves are how you keep that ability. They're the plan; following on is the act of executing it. The two are easy to conflate, but the distinction matters: you can intend to follow on all you like, but if you haven't reserved the capital, the intention is worthless when the round actually opens.
How much should you reserve?
There's no correct number, and nothing here is a recommendation. But the working convention among professional early-stage investors is to reserve at least as much for follow-ons as you deploy in first cheques - a one-to-one reserve ratio. Plenty reserve more than that, planning two or three follow-on tranches into their strongest names.
Put concretely: an angel with £100,000 to deploy and a one-to-one reserve ratio writes roughly £50,000 of first cheques and keeps £50,000 in reserve. That immediately halves the number of new companies they can start with. This is the real cost of reserving - it's not free optionality. Capital sitting in reserve cannot also fund a new deal you'd love to do next month. Reserving is a deliberate narrowing of the top of the funnel in exchange for depth lower down.
Which way that trade-off cuts depends on the size of your programme, your appetite for concentration, and your own liquidity. A reader building a 30-company portfolio over five years thinks about it very differently from someone writing four cheques a year. The point of this piece is not to tell you the ratio; it's to make sure the ratio is a choice you've made on purpose rather than an accident of having run dry.
When does the reserve actually get spent?
A reserve is only useful if you have a rule for releasing it. Without one, "keeping powder dry" quietly becomes "never deploying it", and the discipline collapses into hoarding.
Most disciplined investors release reserves against evidence rather than affection. The honest test is whether the company has hit real milestones since you first backed it - revenue, retention, a credible new lead at a price the progress justifies - not whether you like the founder or want to avoid marking the position down. The hardest version of this is resisting the urge to follow on into a struggling company to "average down". That's usually throwing good money after a position the market has already told you something about. Reserves are meant to back strength, not subsidise weakness. None of this is advice; the judgement is yours.
There's also the contractual angle. Some angels negotiate a pro-rata right in the first round - the entitlement to invest in the next round to hold their percentage steady. A reserve is what funds that right when the time comes. Holding the right without the capital to exercise it is, again, just an intention.
How do SEIS and EIS apply to follow-on tranches?
This is where the UK reliefs shape the mechanics, and where it pays to be precise. A follow-on investment is a fresh share issue, so it's assessed on its own facts at the time it happens. Relief on a later tranche is possible if the company still meets the scheme rules, holds advance assurance, and has headroom under its raise limits. The company issues a fresh SEIS3 or EIS3 certificate for each qualifying issue.
The two schemes behave differently across rounds. The Seed Enterprise Investment Scheme (SEIS) is tightly capped: 50% income tax relief, on a maximum of £200,000 of investment per investor per tax year, and a company can raise only up to £250,000 in total under SEIS across its life. Because that company-side cap is so low and the eligibility window so short - trading less than three years, fewer than 25 full-time-equivalent employees, gross assets under £350,000 at the share issue - SEIS is almost always used once, very early. You rarely reserve for SEIS; the room simply isn't there for a second SEIS tranche.
The Enterprise Investment Scheme (EIS) is where reserves and reliefs interact most. EIS gives 30% income tax relief on up to £1,000,000 of investment per tax year (or £2,000,000 where at least £1,000,000 goes into knowledge-intensive companies), and a company can raise far more under it over time. On the company side, EIS allows a business to raise up to £10 million a year and up to £24 million across its lifetime under the venture capital schemes, with gross assets up to £30 million before the share issue, fewer than 250 full-time-equivalent employees, and shares issued within seven years of the first commercial sale (knowledge-intensive companies get more generous limits). Because those ceilings are high relative to a typical angel cheque, a company can stay EIS-eligible across several rounds - which is exactly when a reserve earns its keep. These company-side figures were updated in HMRC guidance dated 6 April 2026; always confirm the current numbers on gov.uk before relying on them.
Two practical cautions. First, eligibility is never guaranteed for a future round - a company can outgrow the limits, change its trade, or run out of headroom between your first cheque and your second. Second, holding to the three-year minimum holding period on the first tranche has nothing to do with whether the second tranche qualifies; each is its own clock. Treat the relief as a feature of a follow-on you'd want to do anyway, not the reason to do it.
Reserves, cheque sizing and the rest of the portfolio
Reserves don't sit in isolation. They're one lever in a set that includes how big your first cheques are, how many names you want, and how much diversification you're after. Reserve heavily and your first cheques shrink or your portfolio gets smaller. Reserve nothing and you maximise the number of shots on goal but forfeit the ability to load the winners. There's no escaping the arithmetic; there's only deciding where on it you want to sit. We'd argue the worst outcome is the one nobody chooses on purpose: discovering you've run out of capital in the same week your best company opens its Series A.
Frequently asked questions
What are reserves in angel investing?
Reserves are capital an angel deliberately holds back at the outset to fund follow-on rounds in companies they already back, rather than deploying every pound into first cheques. The reserved money is sometimes called dry powder. The point is to keep the ability to put more into the names that are working when they raise again, instead of running out of capital just as the winners need it.
What is a typical reserve ratio for an angel?
There is no rule, and this is not advice, but many professional early-stage investors reserve at least as much for follow-ons as they put into first cheques, which is often described as a one-to-one reserve ratio. Some reserve more. An angel who sets aside half their programme for reserves is effectively planning to back roughly the same names twice rather than spreading thin across new deals.
What is the difference between reserves and follow-on investing?
Reserves are the plan: the capital set aside in advance for later rounds. Follow-on investing is the act: actually deploying that capital when a company raises again. Reserves are what make disciplined follow-on possible. Without a reserve plan, an angel who has spread everything across first cheques has nothing left to follow on with.
Can I claim SEIS or EIS relief on a follow-on round funded from reserves?
Potentially, if the company and the shares still meet the scheme rules at the time of that later share issue, the company holds advance assurance and there is headroom under its raise limits. Each share issue is assessed on its own facts and the company issues a fresh SEIS3 or EIS3 certificate. SEIS is tightly capped and usually used once, very early; EIS more often spans several rounds. This is general information, not tax or investment advice.
Should I keep reserves or just write more first cheques?
That is a personal decision and outside the scope of editorial information. The trade-off is real: capital in reserve cannot also fund new deals, so reserving narrows the number of first cheques you can write. How you weigh that against the ability to back winners again depends on your portfolio size, your liquidity and your own circumstances. Speak to an FCA-regulated adviser before committing capital.
The Carry is independent editorial journalism, not financial, investment or tax advice. Tax treatment depends on individual circumstances and the scheme rules in force, and figures can change - always check the current position on gov.uk and seek FCA-regulated advice before investing.