Angel investment is an investment by individuals, generally high net worth, from their own funds. They might invest alone or as part of a group. Every angel investor will have a different appetite for investment, and usually invests between £10,000 and £500,000. Deals of up to £2 million are becoming more common. Angels:
will not take more than 30% equity in your business if they are investing under the tax efficient EIS/SEIS schemes;
may become active in your business as a director or in supporting the business; and
seek to have a return on their investment over a period of three to eight years - they therefore look to see if your business can fulfil certain criteria from the outset (see below).
You will be able to contact business angels through online platforms and equity crowdfunding platforms. There are many angel networks and larger structured syndicates, small informal syndicates and individual angel investors. Venture capital differs from angel investment in that venture capital invests money on behalf of funds which makes a return for the fund’s investors. Venture capital funding tends to be for larger amounts and be more concerned with rapid return and exit.
When can my business obtain funding?
Revenue generating, or better still, profit generating companies are most likely to secure angel investment as angels can see a higher likelihood of return.
Pre-revenue businesses are possible candidates for angel investment. You will need to prove the concept – attracted customer interest or the product ‘works’. Your company will need to have taken steps to built a defensible position for the concept, for example, the use of patents or copyright or protection for the brand.
‘Idea-stage’ businesses are typically not suitable angel investment. You will need to turn to your family and friends, grants and business accelerators.
What do angels look for?
Angel investors will usually consider the people involved in your business to be the most significant aspect in deciding whether to make an investment. They will then look carefully at the business itself and the core aspects of the business plan. You will need to consider how your business addresses each of the following:
Solve a problem – does the product, technology or service address a real challenge in the market or society?
Disruption – is it likely to make a real impact in the marketplace or establish a new niche?
Protection – does the product or technology have identifiable intellectual property? This may be patentable or may be in the form of copyright or branding or other intangibles – and can you confirm ownership?
Competition – do you have a defensible market position? What other businesses are in competition? How does it compare and what is the unique selling point or advantage? Do you have first mover advantage?
Revenue – how does your business make money? Are there clear identifiable revenue streams? Are there likely to be good gross/net margins?
Scalability – do you have a scalable business model? Are you able to achieve explosive growth?
Proven model – what kind of validation have you had in the market place? Are you already selling or has this been tested out with potential customers? Can you show results of market testing/surveys?
Market – what is the market size? Can you achieve a realistic potential market share?
Tax relief opportunity – is the deal EIS/SEIS-eligible and have ‘advance assurance’ for eligibility?
Exit – do you have a desire and strategy for exit?
Legal advice and documentation
Completing an angel investment will requires legal advice to clarify and confirm the deal terms and protect the parties concerned. Once the principal investment terms have been agreed, these should be integrated into the main legal documents which will typically comprise those set out below:
The negotiation of the term sheet is a one of the more critical parts in obtaining equity investment. The term sheet sets out the principal terms of the transaction such as the valuation, core proposed levels of investment and warranties required from you in relation to the business, as well as the extent of due diligence required by investors.
Investment and shareholders’ agreement:
This document sets out the terms of the investment and regulates the relationship of between you and the investors as fellow shareholders once the investment has been completed. It will address the specific rights of the investors, such as rights to appoint directors, to receive information on the business and to veto certain actions of the company as well as usually containing warranties as to the company’s business.
Articles of association:
Typically, new articles of association are adopted on completion of the funding, which will set out the company’s internal regulations and deal with its management and administration. They deal with matters such as transfers of shares, dividends and voting rights, and complement the investment and shareholders’ agreement.
The disclosure letter sets out disclosures against the warranties contained in the investment and shareholders’ agreement. The process of agreeing the disclosure letter is used by investors to ensure that they have specific and detailed information about your business, as opposed to the often rather general responses which the due diligence process flushes out. If any warranties relating to your business are not true compared to the statements made in the disclosure letter, investors will potentially have a claim against you for losses which they suffer as a result.
Are you thinking about obtaining funding for your company?