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We have a wealth of experience acting for high net worth individuals at the outset of their angel investing journey and for seasoned angel investors who need the occasional bit of legal input.
What is an 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 would be private limited companies with a high growth potential. That might be as a result of the company having an amazing product, or an impressive, experienced founding team, or great traction, or first to market advantage or a huge market. In other words, a company that has the potential to deliver a high return on investment. A common theme for angel investors is investing in innovative companies that are raising funds to get their ideas off the ground.
There are many different ways to angel invest, but many will invest through an angel network or syndicate. This gives an angel access to other experience and expertise (through other members of the network) and to curated deal flow.
The tax breaks available to angel investors
Investing in early stage companies is high risk – you might lose the entirety of your investment. This could happen for a myriad of reasons and is the reason you should only invest what you can afford to lose and should take a portfolio approach.
One of the benefits of investing in UK companies are the various different tax reliefs which are on offer. If the company is UK based (and meets certain criteria) and you (or your spouse) are a UK tax payer, you can benefit from tax reliefs that effectively offset some of the risk and potential losses attached to angel investing. There are two key schemes which are worth mentioning:
- Enterprise Investment Scheme (“EIS”) – which gives income tax relief of 30% on the amount invested in a qualifying start-up, up to a maximum annual investment of (in most cases) £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.
- Seed Enterprise Investment Scheme (“SEIS”) – which gives similar income and capital gains tax benefits. Investors are given income tax relief of 50% on the amount invested in the qualifying start-up, up to a maximum annual investment of £200,000.
We would always suggest that angel investors speak to an accountant to ensure that S/EIS is available as there are various requirements that need to be met by the company and by an investor for this to be available.
How we can help angel investors?
We would always recommend that you take legal advice before entering into any legal documents in connection with an angel investment. It might be that you have seen a founder pitch and expressed an interest in doing further due diligence on the company and the opportunity, so been on a number of due diligence calls. You have then satisfied yourself that you are prepared to invest and are now presented with a term sheet, and or heads of terms setting out the main legal and commercial terms of an investment. More likely you are presented with longer form legal documents such as an investment agreement (aka shareholders’ agreement or subscription and shareholders’ agreement) and a set of articles of association for the company. These set out the rights applicable to your shares and the rights of investors in the company, and you are being asked to sign up to the same. You may also be presented with an advanced subscription agreement (similar to a US type SAFE), or a convertible loan note.
We can conduct a review of these documents and can provide clear legal advice on the same and help you identify any gaps or red flags that you should be aware of or look to negotiate. We also have a wide network of contacts that we work with regularly should you require accountancy or valuation advice, or advice in other jurisdictions.
further information
If you have any questions regarding this blog, please contact Roberta Draper in our Corporate, Commercial & Finance team.
about the author
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.
We welcome views and opinions about the issues raised in this blog. Should you require specific advice in relation to personal circumstances, please use the form on the contact page.
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