Business Angel Financing
A business angel or angel investor is a high net worth individual who invests in early stage high growth private companies with little or no operating history.
The business angel can invest either alone or in a network or syndicate.
Start-up or early stage companies are generally not able to obtain funding from the traditional sources. Private equity firms do not generally have the risk appetite to invest in start-ups and banks usually require substantial assets for security purposes.
Business angels therefore fill the equity finance gap between start-ups and seed capital and venture capital. Businesses looking for investment from business angels are generally looking for investment between £10,000 and £500,000.
Advantages of Business Angel Financing:
- They can make decisions quickly.
- No interest repayments.
- No collateral requirements.
- Access to investor’s sector knowledge.
- Access to investor’s management and mentoring skills.
Disadvantages of Business Angel Financing:
- Give up a share of the equity in the business.
- There is less structural support than from a venture capital company.
- Not suitable for investments of more than £500,000.
- It can take time to find a suitable business angel.
Questions Commonly Asked by Investors:
1. Is there a limit on the amount I can invest under the Seed Enterprise Investment Scheme (SEIS)?
Yes, the maximum amount you can invest under SEIS is currently £100,000 per year. The limit has now increased to £200,000 but the change will not be effective until after April of 2023. Under the Enterprise Investment Scheme (EIS), the maximum limit is £1 million although this can be increased to £2 million for certain investments.
2. Can I structure my investment in the company as a loan?
If you are looking to obtain tax reliefs under SEIS, you will need to apply for ordinary shares in the company. You cannot invest in the company by making a loan to the company nor can you apply for shares that are structured like a loan or which are redeemable shares.
3. Can I partly pay for my shares or pay for my shares in installments?
If you are investing under SEIS or EIS, the shares must be fully paid so, for example, if you apply for 50,000 ordinary shares in the company of £1 each, you will need to pay £50,000 to the company once the shares have been allotted and issued to you. You cannot pay for the share price in installments or at some future date.
4. Can I get a fixed return on my shares?
Yes, but if you are investing under SEIS or EIS, care must be taken when drafting the share rights so that the right to dividends is not cumulative so, for example, the right to receive a dividend does not roll forward to future years if the company does not have sufficient profits to pay the dividend in any one year. Also the amount and timing of any fixed dividend must be wholly independent of the company or any other person so the preferential dividend right must be built into the shares. Care must be taken in drafting the share rights so that the preferential dividend right is not in any way discretionary. Investors will also have the right to receive the non-preferential dividend received by the ordinary shareholders.
5. When can I sell my shares under SEIS?
You will need to hold onto your shares for a minimum period of 3 years. If you sell your shares to anyone other than a spouse or civil partner before that time, the income tax relief will be withdrawn or reduced. Any profit that you make on the sale of the shares will be chargeable to Capital Gains Tax. You will need to discuss the tax implications fully with your tax adviser for your particular circumstances.
6. What happens if I die – who gets my shares?
The shares you hold under the SEIS or EIS are like any other shares that you hold and this means that when you die they form part of your estate and can be passed on to whoever you choose under your Will.
Questions Commonly Asked by Entrepreneurs/Founders:
1. Do I have to give up any equity in my business? If so, how much is typical?
This is a high risk investment so a business angel will usually be looking for a 10% to 25% equity stake but it can be higher.
2. How much will a business angel expect to get involved in my business?
Business angels will require some involvement in the business but they do not want to get involved in the day-to-day running of the business, but business angels can provide specialist expertise and commercial insight.
3. How long will it take to get all the documents?
Once the terms of the investment are agreed, the documentation can be done fairly quickly and would include the following:
Heads of agreement between the parties;
Subscription or shareholders’ agreement;
Detailed articles of association; and
Board resolutions to deal with the allotment and issue of shares and the approval of documents.
4. What will a business angel expect to see before investing?
A detailed business plan at the very least. Other documents may be required depending on the nature of the business.
5. What rights will a business angel expect to have?
The right to income from dividends which may include a fixed rate preferential dividend as well as the right to participate in the non-preferential dividend in the same way as the ordinary shareholders. Although a business angel is a minority shareholder, the business angel will want to have the right to offer strategic management or commercial advice and to veto certain strategic decisions such as changes to the nature of the business and to taking on indebtedness.
