Probably the most common way for start-up and early–stage companies to raise funding is via groups of business angels – often experienced entrepreneurs who acquire shares in early-stage businesses using their own funds. Angels often invest in groups, or syndicates, and may take one or more seats on the board of the investee company, providing expertise and contacts as well as finance.
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The Informed Funding two-minute guide: Angel Networks
- What are angel networks and where do I find them?
Business angels are wealthy individuals, many of whom have already built successful businesses of their own, who invest their own money in early-stage entrepreneurial companies in return for an equity stake. Angels may invest alone but increasingly they join networks which have scores or even hundreds of members, who tend to club together into syndicates in order to invest in a business. Syndicates usually have a “lead angel” who represents the members in negotiations. A “gatekeeper” for the network receives business proposals and decides which ones are suitable to be presented to the members at formal pitch events. You can find a directory of angel networks on the UK Business Angels Association website.
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- How much can I raise this way?
Syndicates of business angels bring together a number of wealthy individuals and therefore the sums available can be quite large. While individual angels are unlikely to invest more than £100,000 in a single transaction, depending on their resources, syndicates are capable of assembling larger sums of up to £1m or more, depending on the number of angels involved, the capital requirements of the business proposition and its growth potential.
- How long does the process take?
Raising equity funding from an angel network is likely to take several months, taking into account the need to negotiate terms, carry out due diligence and prepare the legal documents that will set out the agreement. Having been accepted to pitch to an angel group, the entrepreneurs may be offered coaching and help with their business plan to prepare them for the event. If negotiations subsequently begin with an angel syndicate these tend to result in a Heads of Terms document fairly early in the process, which sets out the main elements of the agreement but is not binding on either side. Final, legal documents will be drawn up and signed at the end of the process, once all due diligence is concluded.
- What kind of due diligence is involved in an Angel investment?
While some angel syndicates may bring in professional advisers to help them scrutinise your business plan and management team, many will rely on their own expertise and contacts. They will want to assess the backgrounds of all the key people involved in the company to judge their experience and pedigree; test the soundness of the accounts and financial projections you have made, including whether your valuation of the business is realistic; check the legal aspects such as existing contracts and ownership of key intellectual property; and research the commercial background for your venture such as the market size and growth rate, existing competition and so on.
- What does it cost?
Aside from your own costs in drawing up business plans and undertaking early development of your product or service, angel networks charge a fee that covers the training and support provided to businesses selected to pitch to their members. This is usually between £250 and £750. There will be further costs if you take your own legal and financial advice on the terms of any deal that you negotiate with a group of angels.
- What will the final agreement consist of?
The exact terms of an angel investment will be set out in the legal documents signed at the end of the process. These will include the Investment and Shareholders Agreement, which specifies the terms of the deal; the Articles of Association, which set out the rules for the running of the company; and the Disclosure Letter, which sets out detailed disclosures of information that the company makes as part of the agreement. These are legally binding agreements and can give grounds for legal redress in the event of disputes.
- Will angels expect seats on the board?
Normally yes, although this may involve only the lead angel from the syndicate. Angels are also likely to put in place rules guaranteeing their rights, including the right to appoint directors, have access to information on the company’s trading performance and to have final approval on spending decisions above a certain level.
- Need to know:
- Under the regulation that governs angel investing, angels need to be either Self-Certified Sophisticated Investors or Self-Certified High Net Worth Individuals, as set out in the Annexe to the Financial Services and Markets Act, 2000.
- Angel investors usually want to take advantage of tax incentives such as the Enterprise Investment Scheme and Seed Enterprise Investment Scheme and you should therefore determine whether your business is eligible for funding under these schemes before you approach potential angel investors. The regulations are available from the HMRC website.
- It is a good idea to be frank from the outset with angel investors about any issues that make be uncovered during due diligence. Finding out later on about problems that weren’t mentioned at the outset can destroy trust and sour relationships.
Expert Tips: Raising finance via equity will result in strengthening of the balance sheet of the company as cash will be raised without increasing the liabilities of the company.
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