You own your own home, and potentially have a second investment property. You make the maximum payment you can (while still receiving tax relief) into your pension each year and have funds invested in the stock market. You have maxed out your yearly ISA allowance, using it as a tax efficient wrapper for your investments into stocks and shares.
In other words, you have been a sensible human and still have funds left over. Or, you have been sensible but want to do something meaningful with the rest of your funds. Let us introduce you to angel investing.
What is angel investing?
Angel investing consists of investing in startups or early stage companies in return for equity (i.e. shares) in the same. These early stage companies are private limited companies with (hopefully!) a high growth potential and/or an amazing product and/or an amazing team or great traction and/or a huge market. You get the picture – what you are looking for is a company where you can achieve a 10x return on the money you plan to invest.
What are the other benefits of angel investing?
There are other benefits to angel investing too. You would be actively helping the UK economy by assisting young, often innovative, companies raise finance and get off the ground. You might be encouraging diversity by only investing in mixed founding teams, or companies aiming to solve a problem you are passionate about. You can pass on your experience and skills by playing a more active role in the startup you invest in – perhaps you can make introductions to key people in your network that might be able to help the startup, perhaps you can plug a skills gap the startup currently has, perhaps you have sector or industry expertise, perhaps you have founded and sold a company in that space… If you join one or several angel investor networks, you can also become part of a group of like-minded people and part of a community. You can learn a great deal from others already within the space. You may collaborate with others when doing your due diligence on a potential investment opportunity and thereby access skills – finance, sales, marketing, tech – which you don’t have, while offering your own expertise. Most angels join an angel investor network for these reasons, even though the ultimate decision as to whether to invest or not is yours alone.
What are the potential risks associated with angel investing?
It would be remiss to talk about angel investing without mentioning the risk. Investing in early stage companies is high risk – you might lose the entirety of your investment. This could happen for a myriad of reasons. Maybe the product just wasn’t very good, maybe the product was brilliant but before its time and therefore there was no market for it, maybe the co-founders all fell out and the company never recovered, maybe the company wasn’t able to raise any further funds, etc. For this reason you should only invest what you can afford to lose and should have a portfolio of startup investments (the received wisdom is at least 10). This is because some will fail, some will do OK and one or two will hopefully be very successful.
What are "EIS" and "SEIS" tax reliefs?
The good thing about investing in UK companies if you are UK-based are the tax reliefs on offer. When investing in early stage companies you can benefit from tax reliefs that effectively offset some of the risk and potential losses attached to angel investing. The two key schemes are the Enterprise Investment Scheme (“EIS”) and the Seed Enterprise Investment Scheme (“SEIS”). EIS gives income tax relief of 30% on the amount invested in a qualifying startup, up to a maximum annual investment of £1 million. Upon the sale of the shares in the company, EIS may also give relief from payment of capital gains tax on the disposal of the shares. SEIS gives similar income and capital gains tax benefits. Investors are given income tax relief of 50% on the amount invested in the qualifying startup, up to a maximum annual investment of £100,000. You can see why these schemes make the UK a very attractive environment for startups and early stage investors. Note that before benefitting from the tax reliefs offered by these schemes, there are various requirements that need to be met by the company and by the angel investor, so do always speak to an accountant to see whether S/EIS is available.
What is self-certifying?
Don’t be surprised if the relevant angel network or startup asks you to self-certify as a High Net-Worth Individual or as a Sophisticated Investor (as defined in the Financial Services and Markets Act 2000). By self-certifying in this way you are confirming that you meet certain requirements set out in the Act and that you are therefore exempt from the general rule that prohibits a person in the course of business from trying to induce another to engage in an investment activity, unless they are regulated by the FCA. The criteria you need to meet to self-certify as a High Net-Worth Individual or as a Sophisticated Investor can be seen on the UK Business Angels Association (UKBAA) website.
If you decide to jump in and make your first angel investment, do carry out proper due diligence. Do also take legal advice (hopefully from us!) on the investment documentation you will be asked to sign when making your investment.
About the author
Roberta Draper is a Senior Associate in the Corporate and Commercial team. Roberta advises startup founders, angel investors and established businesses on a variety of corporate and commercial legal matters. She advises on early stage investments, share option schemes, shareholder agreements, share buybacks and company sales and acquisitions.