The UK continues to be regarded as one of the best places to start a business and attract investment, especially for start-ups and high growth companies.
The access to global markets, the talent pool available to companies, a strong investment ecosystem, supportive government incentives and a robust culture of innovation and research mean that entrepreneurs from all over the world choose to start their business in the UK. In fact, recent research showed that around 39% of the companies on the annual Sunday Times Fast Track 100 (which ranks Britain’s fastest growing companies) have at least one foreign-born founder.
And it is these reasons, and more, that make UK start-ups an increasingly popular jurisdiction for overseas investors to invest in, with the businesses themselves keen to access the capital and support available.
We regularly advise start-ups and investors on investments such as these, so in this article we have set out some of the key steps involved in making an angel investment in the UK.
Step 1 – Agree the Commercial Terms
The first thing to do will be to agree the key terms on which you will be investing. Specifically:
- Pre-money Valuation: what is the company worth prior to your investment?
- Investment Amount: how much are you investing?
- Shareholding: what percentage of the company will you own post-investment?
- Other: are there any other protections that you will require as part of your investment (see ‘Agree the Investment Paperwork’ below for more).
Depending on the size of the investment round, these terms will sometimes be set out in a formal Term Sheet. Either way, it is important to have clarity at the outset to help make the investment process as efficient as possible.
Step 2 – Due Diligence
Each investor will have their own way of conducting due diligence on the business. For some, it will be a case of getting to know the founder(s) and reviewing the company’s financial performance and forecasts. For others, they will want to conduct a more detailed due diligence process that will also focus on areas such as key contracts, intellectual property and key employees.
Further information on due diligence can be found here.
Step 3 – Agree the Investment Paperwork
Shareholders’ Agreement
The approach to paperwork will depend on the size of the round and who the other investors are, however, it is likely that you will be required to sign a Shareholders’ Agreement. This is a private agreement between shareholders and we have listed below some of the provisions that you might expect to see as an angel investor:
- Warranties: you would typically expect the company and the founder(s) to give you certain warranties in connection with your investment. These are statements of fact as to the condition of the investee company, a breach of which could give rise to a claim for breach of contract.
- Consent Matters: you might consider requiring that certain fundamental decisions cannot be made without your consent (or the consent of a certain proportion of the investors if there is a group of you).
- Information Rights: you will want to ensure that the company is obliged to provide you with certain information on a regular basis, particularly regarding the financial performance of the business. This will enable you to properly monitor your investment.
Articles of Association
This is a public document that every company has, and it will set out, amongst other things, how the company is governed and how the board operates. Key things to look out for as an angel investor include:
- Share Classes: are there different share classes and what are the key rights attaching to them? What class share will you be receiving for your investment?
- Right of Pre-Emption: you will want to ensure that you have the right to protect your shareholding if the company raises more funds in the future.
- Tag-Along Rights: if a majority shareholder decides to sell, this gives the minority shareholders the ability to sell on the same terms.
- Drag-Along Rights: similar to tag-along, but here, if the majority decides to sell, they can compel the remaining shareholders to sell on the same terms.
- Leaver Provisions: one of the reasons you are likely to be investing is your belief in the management team and its ability to deliver. Leaver provisions support this by providing that, if an employee shareholder (including the founder) leaves the company before an exit, they can be compelled to sell some or all of their shares. The value at which they can be compelled to sell their shares will be driven by the circumstances of their departure.
If in any doubt about what sort of terms are appropriate for your investment, then take advice from a lawyer well versed in start-up investments – they will be able to give you a steer as to what is and is not reasonable in the circumstances.
Step 4 – Make your Investment
Once all the paperwork has been agreed, it is then time for you to make your investment.
When this has been done, make sure that the company issues you with a share certificate – this is a one page document that provides evidence of your ownership of the shares that you have subscribed for.
We hope that you have found this summary useful. It is of course a high-level introduction only and, if you are looking to make an investment, it is important that you get the benefit of specialist legal advice to ensure that you get the best result possible. We would of course be more than happy to discuss with you how we may be able to support you achieving this, so if you think we might be able to help then please get in touch: harry.trick@michelmores.com.
