Corporate Insight: I’m loving angels

Investment from Business Angels is the most common sought finance for entrepreneurs when they have exhausted their own (and friends’ and family’s) available resources.

02 Feb 2016

Summary

Angels are typically high net worth individuals, or syndicates of individuals, who invest, on average, amounts of anything from £10,000 to £2 million.

What are the key things for entrepreneurs and fledgling businesses to think about when they are considering Angel investment?

Why Angel Investors?

Think about what you need the money for and over what period. Do you really need the money or can you bootstrap it? You will retain more control, avoid dilution and are less likely to overspend if you don’t have external investment. Or will lack of capital significantly impact your ability to grow?

Do you need more from your Angel than just their money? Are you wanting to tap into their expertise and connections?

Have you maximised your network?

Your network can be an excellent source of advice and financing. Speak to entrepreneurs who have successfully navigated the journey, friendly advisors and professionals - they may be able to help with introductions and signposting.

What’s your story?

Who are you and your team? What is your background and experience? Have you done this before (successfully)? What journey has your business and your product taken to date?

Angels start by looking at the people and the idea that they will be backing. They will ask all of these questions and many more so get confident with your responses. An Angel will do some due diligence on your business; commercial, financial and legal. Get organised. Get your accounts processes in order and pull together all key agreements (including those with customers, suppliers and developers), employment and freelancer contracts, evidence of IP ownership, your current share structure and what it looks like post - investment.

What does the future hold?

Any business wishing to raise money from any source will need a solid business plan. Investors want to know that their money will be put to good use.

It should clearly articulate why you are asking for the level of investment you are, future funding needs, sales forecasts, (realistic) cash flow forecasts, your market and industry, customers and end - users, timescales and key milestones, opportunities, your competitive advantage, your IP (and ongoing or future R&D), threats and barriers to entry.

Angels will also expect you to have an exit strategy – how will they realise their investment?

Get the tax right.

Angels will look to maximise available tax incentives most commonly EIS and will want the comfort that their investment will be a qualifying investment. Take professional advice to determine whether or not your business and the proposed investment will qualify.

On what terms?

As well as shares, every Angel will want to know what they are getting for their investment. They will want to protect their investment and ensure that they are not prejudiced in future funding rounds. Expect to give legal assurances about your business, and expect that an Angel may also want the right to appoint a director; anti - dilution or pre - emption protections; rights to information; restrictive covenants on management and shareholders; rights on exit; and limits on the transfer of shares.

The Legals.

Once you have an Angel interested in investing, cover - off important commercial and legal points (including those mentioned above) in a term sheet and take some professional advice. A term sheet or investment agreement provided by an Angel investor may be skewed towards their own interests.

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