Introduction to Angel Investing

"Business Angels are high net worth individuals who invest on their own, or as part of a syndicate, in high growth businesses. In addition to money, Business Angels often make their own skills, experience and contacts available to the company."

Business Angels rarely have a connection with the company before they invest but often have experience of its industry or sector. The commitment of Business Angels is often very strong.

The majority of Business Angels make investments for financial reasons. However, there are also other motives for investment, for example, taking an active part in the entrepreneurial process, and the enjoyment from being part of the success of a good investment and the sense of putting something back in.

Business Angels are an important but still under-utilised source of money for new and growing businesses. A typical Business Angel makes one or two investments in a three-year period, either individually or by linking up with others to form a syndicate. Some Business Angels invest more frequently. There are an estimated 18,000 angel investors across the UK, and around £800m is invested by Angels on an annual basis.

It is often thought that you have to be very wealthy to be an Angel Investor, but in fact many individuals invest from around £10,000 in any one company, however some Angels invest much more. However, your money is tied up for several years so it must be money outside your normal finance needs.

Business Angels would generally invest between £10,000 and £750,000 in an investment. Investments are usually made in return for a share in the business. Most Angel investors will take a portfolio approach and invest in more than one company to give a spread of opportunities to diversify their risks.

Angels often invest as part of a group called a 'syndicate', organised through personal contacts or a Business Angel Network. One investor will generally act as a Lead Investor, sometimes referred to as the 'archangel', and will act on behalf of the syndicate.

As well as investing money, Business Angels can also bring valuable know-how, contacts and experience to the businesses in which they invest.

Business Angels invest across most industry sectors and stages of business development, but especially in early and expansion-stage businesses. Most prefer to invest in companies within 100 miles of where they live or work. Investors in technology companies tend to be more prepared to travel longer distances.

What should you consider before becoming a Business Angel?

  • It is highly recommended that you get legal advice for assessing documentation, structuring the deal and drawing up agreements.
  • If you are new to angel investing, it is worthwhile obtaining help from an accountant or corporate financier experienced in assessing business plans and conducting diligence, as well as providing tax advice on the Enterprise Investment Scheme (EIS). You should also discuss certification either as a High Net Worth or Sophisticated Investor, as defined by the Financial Services Authority (FSA) under the Financial Services and Markets Act 2000 (FSMA). Click HERE for more information.
  • Plan how you intend to achieve a return on your investment, for example from dividends, fees and capital gains.
  • Find out about the entrepreneur and management team's background and track record. Establish whether the entrepreneur, fellow directors or any of the management team have been bankrupt or been a director of an insolvent company.
  • If you are new to angel investing, consider investing alongside an experienced Business Angel. Some of our Members will be able to put you in touch with an experienced angel, with whom you can invest.
  • Be patient. It takes more time than many business angels anticipate to find the right company.
  • Finally, do not invest without considering how to exit.

Can you get Tax Relief?

The Enterprise Investment Scheme (EIS) can be valuable to those who find an investment. For an investment over £500 in eligible shares, tax relief is given at 30% up to a maximum investment of £500,000 in any tax year, for those individuals and companies eligible for EIS.

EIS investments are exempt from capital gains tax if held for three years. In addition it is possible to defer payment of tax on an existing capital gain by setting it against an EIS investment.

EIS is very complex and you are strongly advised to seek help from a tax expert.