Angel investors have become the new TV reality rocks stars since the launch of the long-running BBC television show “Dragons’ Den” way back in 2005.

In this article, Burton Beavan looks at angel investors and what they can bring to your business. In a companion article next week, we’ll look at the role venture capital funds play in growing companies.

According to the UK Business Angels Association, there are 18,000 UK angel investors who, on average, will put in £42,000 into each company they back for an average of 8% of the share capital. The total sum of their investments comes to £850m per annum. These investments produce an approximate internal rate of return of 22% gross of tax and costs.

What do you need to know about angel investors?

Angel investors – what’s in it for them?

It’s personal, professional, and financial.

They have lots of their own personal disposable cash available to them and that cash is sitting there doing nothing.

Angels don’t like it when their cash is doing nothing, and they hate it even more when they’re idle and they’re doing nothing.

Angels generally have established and sold a number of businesses in their lifetimes. They enjoy the cut and thrust of business and time has proven that they’re good at making money and building organisations to scale.

There are also some incredibly generous tax incentives available to angels for putting their money into speculative businesses. We’ll cover that later on in the article.

Angel investors – how much do angels invest and what role do they play in a business?

Angels will look to invest between £10,000 and £500,000 of their money into a venture.

Angels will also form syndicates that can put substantially higher sums into a company. Angels like to be involved in the growth of their investments and the move towards syndicates means that other investors they invite and they feel they can work with can bring skills, experience, and connections to an investment that they can’t.

Angel investors – how long do they want to be involved for and what do they want at the end of it?

A typical angel investment will last 3 to 8 years. The 3-year mark is important for tax reasons which, again, we’ll cover later on.

Angels look for an exit. If you buy shares in a company which isn’t listed on the stock market, your investment is said to be “illiquid” – it’s not easy to find someone to buy the shares nor buy the shares at the price you desire.

Their exit – that’s the point at which they check out and make their financial return – can come from a further round of investment (from, say, a venture capital fund), a trade sale (to a competitor or to a company looking to enter the sector), or a floatation on a major stock exchange.

Angel investors – what type of company do they want to invest in?

Angel investors are aware at all times that their money is at risk. That said, they like companies with a strong management team who have experience, drive, and previous success.

Businesses which exist only as an idea are not suitable for angel investors – if that’s why you’re reading this article, good luck but sorry as you will almost certainly not find what you’re looking for with angels.

Companies already trading with proven income streams, increasing turnover, and controlled costs are attractive propositions, especially where an angel can see the chance to grow the business. Never underestimate how great a trading business with actual revenues, scalability, and a track record of standing on its own two feet against existing competitors looks.

If your business is pre-revenue, the four most important questions you’ll have to provide solid, believable answers to an angel are:

• Is there something your company owns that is unique?
• If so, can you defend that uniqueness with patents or another form of intellectual property protection?
• Have you solved a problem that no-one else has?
• And can you prove that people want this and will pay money for it?

As we mentioned earlier, angels are more likely than ever to operate in syndicates. If an angel can see where he or she may add genuine value through knowledge, experience, and connections, that’s something you can’t put in your business plan. If an angel doesn’t have that but wants to invite someone in who does, that’s just as good.

Angel investors – tax advantages

There are some very generous tax schemes available to angel investors. To take advantage of these, angels must self-certify as a high net worth individual or as a sophisticated investor.

There are two schemes, SEIS and EIS.

The schemes are complex to describe and we’ll cover them soon in a later Burton Beavan article but here’s the crux of them both:

NOTES:

(*) You must hold onto your shares for 3 years to qualify for CGT exemption on exit and the value can claim back is equivalent to the income tax relief you enjoyed in the tax year during which you made the initial investment

(**) SEIS and EIS, with their range of reliefs and exemptions, provide a maximum loss protection if your investment fails. For example, for £10,000 invested in an SEIS scheme, your actual maximum loss is capped at 13.5% (£1,350) and in EIS at 38.5% (£3,850). Losses for basic and higher rate tax payers are higher.

Burton Beavan health warning – SEIS and EIS are great schemes. If you’re an investor in these schemes, be sure you get advice from us to make certain all the “i”s are dotted and “t”s crossed before you commit. If you’re a company looking for investment, you do not need to worry about these tax reliefs but you do need to ensure that your company is correctly registered with SEIS and EIS. Please come to us for this.

Angel investors – how much of my company is an angel going to want?

If your angels invest in you via an SEIS or EIS scheme, they cannot have more than 30% of the shares or the voting rights. There are also restrictions on the relationship they can have with your company – we’ll cover SEIS and EIS in much more detail in the coming weeks so keep an eye out for that.

The average angel owns 8% of your company shareholding post-investment, according to the UK Business Angels Association.

Angel investors – how can Burton Beavan help?

We work with tech start-ups and help with management accounting for growth. Our MD, Gareth, is also a veteran of Silicon Valley and has seen many a deal done with both angels and VC funds.

Call us on 01606 333 900 or email hello@burtonbeavan.co.uk.