Are you a potential business angel?

A perfect storm brewing

19th May 2011

Format

A perfect storm is an expression that describes an event where a rare combination of circumstances will aggravate a situation drastically

Perfect for whom?

Small high growth Companies

Squeezed by the banksCustomer demand downPayment terms becoming more aggressivePublic funding tight!!!Space to innovate

Perfect for whom?

Small high growth Companies

Squeezed by the banksCustomer demand downPayment terms becoming more aggressivePublic funding tight!!!Space to innovate

InvestorsPoor returns elsewhereCompany valuations are low (www.perda.co.uk)Tax incentivesChange in culture within companiesGovernment initiatives

Banks attitudesBusiness Growth Fund - £2.5B40 deals per year – SMEs?Statement BBC this morning “… it’s to support risky growth – for instance a high quality company looking to build a new factory…”Cultural change!

Result

More investorsMore companiesShift in type of investor

Greater level of DDMore involvementSyndication v Lone ranger

Effect on dealsThe jury is out!

Nesta report (1) Profile

53 years old13 years with large companyEIS 57%10% of wealth is in angel investments83% made with co-investors

Deal profile

87 deals (14 deals per year);63 businesses (64% first round); £6.75m from SWAIN investors;£44m total finance;Ave. Stake 18.5%Typical post money valuation <£1mFailure rate approx 20%

www.winterrule.co.uk9

The Tax Tale...

John Endacott, Tax Partner, Winter Rule LLP

Don’t let tax tail wag the dog

But need to consider tax stimulus for individuals to invest in Companies

George did...

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EIS – overview

• Enterprise Investment Scheme• Tax relief for qualifying individuals investing in

ordinary shares in qualifying companies• Tax reliefs

– Income tax relief– Capital Gains tax deferral relief

• Budget 2011 – good and bad news• Basics and beyond

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EIS – the bad news

• 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.

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EIS – the good news

• Rate of income tax relief increased from 20% to 30% for qualifying shares issued after 5 April 2011

• Certain limits on qualifying companies will be increased as follows with effect from shares issued after 5 April 2012:– Number of full-time employees – 250– Limit on gross assets increased to £15 million before the investment– Maximum annual amount that can be invested in the company

increased to £10 million– Maximum annual amount that can be invested by an individual in all EIS

companies is £1 million

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EIS – The Tax Reliefs

• Income tax relief– 30% of sum invested allowable as a deduction in computing an

Individuals Income Tax liability

• Capital Gains Tax Deferral– Can defer capital gains incurred on different assets indefinitely– If gains made < 36 months previous or < 12 months after EIS

investment

• CGT freedom– No CGT on disposal– If investment qualified and continued to qualify for Income Tax

relief

• Loss relief• Inheritance Tax Exemption

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EIS – the Investment

• In cash• In ordinary shares

– No preferential rights– No risk protection

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EIS – Qualifying individual

Criteria Income Tax Relief CGT Deferral

UK resident Y Y

Individual Y Y

Connected N Y

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EIS – Qualifying Individuals: Connected

• By financial interest (in Co or Subsidiary)– Control– Hold > 30% of share capital (or share capital and loan capital)– Entitled to receive > 30% of assets on winding up– Conditions apply 2 years pre and 3 years post investment (or

commencement of trade if later)– Associates interests taken into account

• By employment– Partner, Director (but see Business Angel) or Employee– Associate of – Conditions apply 2 years pre and 3 years post investment (or

commencement of trade if later)

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EIS – Business Angel

• Can be a director– No previous involvement in trade carried on prior to share issue– No remuneration or subsequent remuneration reasonable– Can qualify for Income Tax relief on investments subsequent to

becoming paid Director if within specified period of original subscription

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EIS – Qualifying Company

• UK Resident• Not a subsidiary• Qualifying trade• Size criteria

• Clearance Application

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Other tax related matters to think about?

• Entrepreneurs Relief• Enterprise Management Scheme• R&D Tax Relief

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Finding a company to invest in and what to look for?

19th May 2011

Personal contactsProfessional firmsAngel networks

Leads

Leads

Personal contacts Professional firms Angel networks

Direct links to the business P W OImplied recommendation O P OAn angle P P W

Pre-qualified O P PSyndication / co-operation O O PLeverage co-investment O O P

Finding a company

Mix of all of the aboveClear selection criteria – what do you really want – where is your comfort zone?Clear rejection criteria and be brutalThe initial hunt is a numbers game

Working the odds

In-depth market research – surprised what you learn from googleTest the companies commitment early on – visit the businessTalk to their suppliers and customersMystery shop the businessWork with other experienced investorsUse professional firmsDevelop your own skills

De-risk the opportunity

Tranche investmentConsider the use of ratchetsStructure deals – use of debt / loan notesOn-going involvementDevelop a portfolio approachA good deal is painful for both sides!

Co-operation / syndicates

Agree a common approachEstablish allocation of resources both through evaluation / due diligence and on-going monitoringUnderstand the “groups” attitude to future roundsIf more than two investors then use a lead investor

Nesta report (Investment)

£ size per investor £42,000Pre-money £875,00015% seed36% start up

Nesta report (Returns)

Ave hold 3.6 yearsExits (incl failures) 406Overall multiple 2.2xApprox IRR 22%9% of exits gave 80% of cash returnedIn US 10% gave 90% of cash returned

Finance in Cornwall 2011Sally Norcross Webb

Corporate Partner

Stephens Scown LLP

19th May 2011

Finance in Cornwall 2011 19th May 2011

• Non Disclosure Agreement

• Heads of Agreement

• Due Diligence

• Investment Agreement (or Sale and Purchase Agreement)

• Disclosure Letter and Documents

• Completion Documents

Documents

Finance in Cornwall 2011 19th May 2011

• Newco

• New Articles of Association

• Investor shares

• Reserved matters

• Directors

• Information

Structure of the deal

Finance in Cornwall 2011 19th May 2011

Shares• Ordinary / Convertible / Preferred

• Voting

• Pre-emption Rights

• Dragalong and Tagalong

• Exit

Finance in Cornwall 2011 19th May 2011

Any questions?

Sally Norcross Webb – Corporate Partner

Contact Information:Email: s.norcross-webb@stephens-scown.co.uk Mobile: 07976 829584

Investment readiness

19th May 2011

Deal phases

Prepare Bus Plan

Introduction

Read plan / Evaluation / Visit / Syndicate

Initial Negotiations

Heads of terms

Due Diligence

Legal & final neg

Understand offering

Prepare investment case

Prepare pitch

Rehearsal

Bringing it all together

Investable business

Macro Level

Micro Level

Market Domains Industry Domains

Mission, Ability toAspirations, Execute Propensity on CSFsfor Risk

Connectedness up and down Value Chain

Team Domains

Market Attractiveness

Target Segment Benefits and Attractiveness

Industry Attractiveness

Sustainable Advantage

Key criteria

Management – management – managementAttitude to risk and growthAttitude towards equity – loss of some controlCommitmentWorkmanlike relationshipControlled flexibilityPlan A – plan B ……Clear vision of exit

Using SWAIN effectively

Prepared for InvestmentExpert panelsInvestor lunchesPipeline review meetingsForums

Any Questions?

www.winterrule.co.uk41