Typically, business angels are high net worth individuals acting individually or together as a syndicate with other business angels. Business angel investors investing seed capital will often subscribe for ordinary shares for Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS) purposes.

Any investment into a company requires significant planning and to attract an angel investor with business acumen, the planning required must cover every last detail – as we have all seen on Dragons’ Den where the investors tear into a startup on their financial figures, valuations, and projections, as well as the design of their product!

Therefore, before seeking angel investment, it is important to understand what these types of investors will be looking for, to ensure your startup is well-prepared and in the best position to attract them.

Any investor will want to see:

• The business plan of the company: The scope and sophistication of a business plan may vary depending on the size and stage of the relevant company, but any company seeking outside finance will need to be able to describe its goals, its financial plan to achieve them and its projected profitability in a clear and coherent way.
• A capital table, or "cap table": This provides investors with a comprehensive overview of the target company’s existing share capital and shows the dilutive impact that the funding round will have. The cap table will show the target company's fully diluted position, including any outstanding or to-be issued rights to subscribe for, or to convert securities into, shares in the target company (such as options, warrants or convertible loan notes).
• Term sheet: Having reviewed the business plan, formed its own investment model and held discussions with management, an investor that is sufficiently interested in the target company will circulate an initial draft of the term sheet (although this may be prepared by the target company). The term sheet will outline in detail the terms of the investor's proposal and set out additional rights and requirements that the investor expects in consideration for its equity investment.

Due Diligence

When the term sheet has been agreed and executed by all parties, the investor will proceed with its due diligence enquiries. It is often a material condition to an investment that due diligence has been satisfactorily completed by the investor (or its advisors) before completion may take place.

The investor's due diligence exercise often comprises:

• Financial due diligence – In seed and early-stage investment rounds, the investor may conduct financial due diligence in-house without incurring the additional fees of external advisors.
• Legal due diligence – The scope of the legal due diligence exercise will usually depend on the trading history of the target company and the investor's risk appetite. As is often the case for a seed or series A investment, target companies are frequently early-stage companies with little or no significant trading history.
• Technical due diligence – It may be appropriate for the investor to engage specialists to carry out technical due diligence. For example, if the target company is a specialist technology company with a great deal of value or potential value attributable to its intellectual property, the investor may wish to instruct a specialist research organisation to conduct an independent report on the status of the target company's intellectual property.

The investor may also conduct other types of commercial due diligence (such as a market analysis, and interviewing key customers and suppliers). The nature and scope of the due diligence exercise will vary from transaction to transaction and will likely also depend on the target company's stage of development.

Legal Documents

Once the investor is satisfied with the investment, the key transaction documents to record the investment are: articles of association, shareholders agreement, investment agreement, disclosure letter and service agreements/employment contracts. 

Conclusion

Whilst the process is thorough and time-consuming, the mentorship, funds, knowledge, and other financial benefits from an angel investor can be instrumental in a young startup’s success. Preparing the businesses for the above stages will also enhance an entrepreneur’s confidence in their product, and be ready to face the trickiest questions from angel investors, even from Dragons Deborah Meaden or Peter Jones!