How to Put Together An Angel Investment in a Private Company
Originally published: 22/12/2017 16:10
Publication number: ELQ-36612-1
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How to Put Together An Angel Investment in a Private Company

A guide on how a private company can create an angel investment.

Introduction

There is a growing trend for equity investment deals by private individuals (known as ‘angels’) in young and small private companies. This note addresses what might be expected in terms of the legal documentation involved, as well as some of the practical issues concerning deal management.


(Note: this guide needs to be updated to mention the new Seed Enterprise Investment Scheme (“SEIS“), although the EIS is still available to investors in startups raising over £150k and also to companies raising a further round of finance once they have made use of the SEIS)

  • Step n°1 |

    Angel Investors

    As opposed to larger scale venture capital firms and private equity funds, business angels are private individual investors who chose to invest directly in private companies in return for an equity stake in the target investee company and (potentially) a position on its board of directors. Typically, business angels are high net worth individuals acting individually or together as a syndicate and they are often capable of investing amounts from £10,000 to in excess of £2 million.


    Business angels often seek to invest under the Enterprise Investment Scheme (EIS). The EIS was introduced by the government to incentivise wealthy people to invest in high growth companies, principally by making the investment tax efficient. To comply with the EIS, investors have to subscribe for ordinary shares and any preferential rights will often be negotiated under the investment agreement in a manner which will not prejudice EIS relief.

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  • Step n°2 |

    Preliminary Documents

    Once an investor likes a business plan (or ‘investment memorandum’) enough, the investor will usually provide the entrepreneur with an initial draft of the heads of terms. This will set out the main terms, rights and requirements of the investor’s proposal which it expects in consideration for its equity investment. The heads of terms is usually marked ‘subject to contract’ with the exception of such clauses as confidentiality and exclusivity. Sometimes a separate confidentiality agreement is signed at the outset when the business plan is received.

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  • Step n°3 |

    Due Diligence

    The investor’s investigations will normally cover separate financial, legal and technical due diligence. Other types of commercial due diligence, such as market analysis, may also take place. The nature and scope of any due diligence will vary and will normally depend on the company’s stage of development.


    The investor’s lawyers will be asked to conduct an element of legal due diligence on the target investee company. The extent of this will depend on the trading history of the target and the investor’s appetite for information about the target. In any case, the scope of due diligence will usually cover areas such as the constitution and structure of the board and shareholders, intellectual property, employment contracts, existing financing arrangements, existing licence, research and development and other collaboration agreements, property arrangements and key commercial contracts.

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