Are you a potential business angel?


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A seminar aimed at informing the potential investor of the practicalities of making an equity investment.
Event hosted by Winter Rule on 19 May 2011 - Part of Cornwall Business Week.

Published in: Economy & Finance, Business
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Are you a potential business angel?

  1. 1. A perfect storm brewing<br />19th May 2011<br />
  2. 2. Format<br />A perfect storm is an expression that describes an event where a rare combination of circumstances will aggravate a situation drastically<br />
  3. 3. Perfect for whom?<br />Small high growth Companies<br />Squeezed by the banks<br />Customer demand down<br />Payment terms becoming more aggressive<br />Public funding tight!!!<br />Space to innovate<br />
  4. 4. Perfect for whom?<br />Investors<br />Poor returns elsewhere<br />Company valuations are low (<br />Tax incentives<br />Change in culture within companies<br />Government initiatives<br />Small high growth Companies<br />Squeezed by the banks<br />Customer demand down<br />Payment terms becoming more aggressive<br />Public funding tight!!!<br />Space to innovate<br />
  5. 5. Banks attitudes<br />Business Growth Fund - £2.5B<br />40 deals per year – SMEs?<br />Statement BBC this morning “… it’s to support risky growth – for instance a high quality company looking to build a new factory…”<br />Cultural change!<br />
  6. 6. Result<br />More investors<br />More companies<br />Shift in type of investor<br />Greater level of DD<br />More involvement<br />Syndication v Lone ranger<br />Effect on deals<br />The jury is out!<br />
  7. 7. Nesta report (1) Profile<br />53 years old<br />13 years with large company<br />EIS 57%<br />10% of wealth is in angel investments<br />83% made with co-investors<br />
  8. 8. Deal profile<br />87 deals (14 deals per year);<br />63 businesses (64% first round); <br />£6.75m from SWAIN investors;<br />£44m total finance;<br />Ave. Stake 18.5%<br />Typical post money valuation <£1m<br />Failure rate approx 20%<br />
  9. 9. 9<br />The Tax Tale...<br />John Endacott, Tax Partner, Winter Rule LLP<br />
  10. 10. Don’t let tax tail wag the dog<br />But need to consider tax stimulus for individuals to invest in Companies<br />George did...<br /><br />10<br />
  11. 11. EIS – overview<br />Enterprise Investment Scheme<br />Tax relief for qualifying individuals investing in ordinary shares in qualifying companies<br />Tax reliefs<br />Income tax relief<br />Capital Gains tax deferral relief<br />Budget 2011 – good and bad news<br />Basics and beyond<br /><br />11<br />
  12. 12. EIS – the bad news<br />A company whose trade consists substantially in the receipt of FITs will only be eligible for EIS relief where commercial generation commences before 6 April 2012. This will not affect shares issued before 23 March 2011.<br /><br />12<br />
  13. 13. EIS – the good news<br />Rate of income tax relief increased from 20% to 30% for qualifying shares issued after 5 April 2011<br />Certain limits on qualifying companies will be increased as follows with effect from shares issued after 5 April 2012:<br />Number of full-time employees – 250<br />Limit on gross assets increased to £15 million before the investment<br />Maximum annual amount that can be invested in the company increased to £10 million<br />Maximum annual amount that can be invested by an individual in all EIS companies is £1 million<br /><br />13<br />
  14. 14. EIS – The Tax Reliefs<br />Income tax relief<br />30% of sum invested allowable as a deduction in computing an Individuals Income Tax liability<br />Capital Gains Tax Deferral<br />Can defer capital gains incurred on different assets indefinitely<br />If gains made < 36 months previous or < 12 months after EIS investment<br />CGT freedom<br />No CGT on disposal<br />If investment qualified and continued to qualify for Income Tax relief<br />Loss relief<br />Inheritance Tax Exemption<br /><br />14<br />
  15. 15. EIS – the Investment<br />In cash<br />In ordinary shares<br />No preferential rights<br />No risk protection<br /><br />15<br />
  16. 16. EIS – Qualifying individual<br /><br />16<br />
  17. 17. EIS – Qualifying Individuals: Connected<br />By financial interest (in Co or Subsidiary)<br />Control<br />Hold > 30% of share capital (or share capital and loan capital)<br />Entitled to receive > 30% of assets on winding up<br />Conditions apply 2 years pre and 3 years post investment (or commencement of trade if later)<br />Associates interests taken into account<br />By employment<br />Partner, Director (but see Business Angel) or Employee<br />Associate of <br />Conditions apply 2 years pre and 3 years post investment (or commencement of trade if later)<br /><br />17<br />
  18. 18. EIS – Business Angel<br />Can be a director<br />No previous involvement in trade carried on prior to share issue<br />No remuneration or subsequent remuneration reasonable<br />Can qualify for Income Tax relief on investments subsequent to becoming paid Director if within specified period of original subscription<br /><br />18<br />
  19. 19. EIS – Qualifying Company<br />UK Resident<br />Not a subsidiary<br />Qualifying trade<br />Size criteria<br />Clearance Application<br /><br />19<br />
  20. 20. Other tax related matters to think about?<br />Entrepreneurs Relief<br />Enterprise Management Scheme<br />R&D Tax Relief<br /><br />20<br />
  21. 21. Finding a company to invest in and what to look for?<br />19th May 2011<br />
  22. 22. Personal contacts<br />Professional firms<br />Angel networks<br />Leads<br />
  23. 23. Leads<br />
  24. 24. Finding a company<br />Mix of all of the above<br />Clear selection criteria – what do you really want – where is your comfort zone?<br />Clear rejection criteria and be brutal<br />The initial hunt is a numbers game<br />
  25. 25. Working the odds<br />In-depth market research – surprised what you learn from google<br />Test the companies commitment early on – visit the business<br />Talk to their suppliers and customers<br />Mystery shop the business<br />Work with other experienced investors<br />Use professional firms<br />Develop your own skills<br />
  26. 26. De-risk the opportunity<br />Tranche investment<br />Consider the use of ratchets<br />Structure deals – use of debt / loan notes<br />On-going involvement<br />Develop a portfolio approach<br />A good deal is painful for both sides!<br />
  27. 27. Co-operation / syndicates<br />Agree a common approach<br />Establish allocation of resources both through evaluation / due diligence and on-going monitoring<br />Understand the “groups” attitude to future rounds<br />If more than two investors then use a lead investor<br />
  28. 28. Nesta report (Investment)<br />£ size per investor £42,000<br />Pre-money £875,000<br />15% seed<br />36% start up<br />
  29. 29. Nesta report (Returns)<br />Ave hold 3.6 years<br />Exits (incl failures) 406<br />Overall multiple 2.2x<br />Approx IRR 22%<br />9% of exits gave 80% of cash returned<br />In US 10% gave 90% of cash returned <br />
  30. 30. 19th May 2011 <br />Finance in Cornwall 2011<br />Sally Norcross Webb<br />Corporate Partner<br />Stephens Scown LLP<br />
  31. 31. Finance in Cornwall 2011<br />19th May 2011 <br />Documents<br /><ul><li> Non Disclosure Agreement
  32. 32. Heads of Agreement
  33. 33. Due Diligence
  34. 34. Investment Agreement (or Sale and Purchase Agreement)
  35. 35. Disclosure Letter and Documents
  36. 36. Completion Documents </li></li></ul><li>Finance in Cornwall 2011<br />19th May 2011 <br />Structure of the deal<br /><ul><li> Newco
  37. 37. New Articles of Association
  38. 38. Investor shares
  39. 39. Reserved matters
  40. 40. Directors
  41. 41. Information</li></li></ul><li>Finance in Cornwall 2011<br />19th May 2011 <br />Shares<br /><ul><li> Ordinary / Convertible / Preferred
  42. 42. Voting
  43. 43. Pre-emption Rights
  44. 44. Dragalong and Tagalong
  45. 45. Exit</li></li></ul><li>Finance in Cornwall 2011<br />19th May 2011 <br />Any questions?<br />Sally Norcross Webb – Corporate Partner<br />Contact Information:<br /> <br />Mobile: 07976 829584<br />
  46. 46. Investment readiness<br />19th May 2011<br />
  47. 47. Deal phases<br />Understand offering<br />Legal &<br /> final neg<br />Due Diligence<br />Prepare Bus Plan<br />Heads of terms<br />Prepare investment case<br />Initial Negotiations<br />Prepare pitch<br />Read plan / Evaluation / Visit / Syndicate<br />Rehearsal<br />Introduction<br />
  48. 48. Bringing it all together<br />
  49. 49. Investable business<br />Market Domains<br />Industry Domains<br />Macro <br />Level<br />Market Attractiveness<br />Industry Attractiveness<br />Mission, Ability to<br />Aspirations, Execute <br />Propensity on CSFs<br />for Risk<br />Connectedness up <br /> and down Value Chain<br />Team Domains<br />Micro <br />Level<br />Target Segment Benefits and Attractiveness<br />Sustainable Advantage<br />
  50. 50. Key criteria<br />Management – management – management<br />Attitude to risk and growth<br />Attitude towards equity – loss of some control<br />Commitment<br />Workmanlike relationship<br />Controlled flexibility<br />Plan A – plan B ……<br />Clear vision of exit<br />
  51. 51. Using SWAIN effectively<br />Prepared for Investment<br />Expert panels<br />Investor lunches<br />Pipeline review meetings<br />Forums<br />
  52. 52. Any Questions?<br /><br />41<br />