Many people, who are otherwise perfectly suited, delay getting involved in angel investing because it seems mysterious, complicated and, perhaps, reserved for the absurdly wealthy. But this should not be the case. More and more people are taking the plunge and discovering that angel investing is much easier than expected and more interesting.
A common point of friction for people considering getting into angel investing is the mechanics of making the investment. This section aims to demystify that process and demonstrate that the only reason for not angel investing is because you can’t find a company good enough.
The Mechanics:
Put simply, investing in a startup involves giving money to the company in return for which they give you an equity stake.
All the technical and legal documentation is drawn up by the company’s lawyers, and so all that is required on your part is to fill out and sign the documents they send you. (You may of course want to get a lawyer to check the documents are in order.)
And, as is most frequently the case for new angel investors, you will be investing alongside other more experienced investors. If you have done your due diligence (see iii. Due Diligence) properly, then you will have met and discussed the deal with at least one of these investors. If you are investing in the same round as them, then it will generally be on the same terms as them and you can be reassured by following them into the investment.
Therefore, as a new angel investor or even an experienced one, it is not the mechanics of the investment that should be your concern, but rather doing thorough and relevant due diligence. You don’t win at this game by having a lawyer’s eye for favourable deal terms, but by investing in the right startups. When you hear people talking about a successful angel investor, they’re not saying, “Wow, he really nailed down a favourable valuation for himself”, but “Wow, he invested in PayPal!” . That should be your chief concern – picking a winner. (You can read more about negotiating deal terms in the next section).
That said, it’s still useful (and comforting) to have a working knowledge of how the investment process usually runs. Here’s a narrative example for your edification and enjoyment:
(A long time ago in a galaxy far, far away…)
Angel Investor Yoda has completed due diligence on an exciting bioengineering company called Kamino Clones Ltd.
He has looked up the key team members and advisors on ForcedIn and StarGoogle; he has checked that the claims made about the size of the market opportunity and projected growth in their business documents are true (as far as possible); he has discussed the deal with investors who have already invested and investors who are considering investing in the same round; and he has meditated upon the undertaking and detected no disturbance.
He is pleased and confident that not only will he get a huge return on his initial investment of 50,000 galactic credits, but also that the company’s success will help bring balance to the Force.
He records a message for the founders of Kamino Clones Ltd on his holoprojector. The gist of the message is that to make an offer of 50,000 galactic credits, happy he is.
The following day, he receives a response from the Chief Executive Kaminoan.
The company would be delighted to accept his offer and will send across the relevant documents shortly. In the meantime, they ask if he could confirm his full name and address so that they can draw up the agreement.
Later that week, Angel Investor Yoda receives the documents which he downloads to read.
The first is a document to check his identity and the second is the investment agreement which sets out the details of the investment. The Chief Kaminoan has already signed the agreement.
Yoda shows the agreement to a lawyer friend to check that the terms are in order before holding his breath as he signs away his hard-earned credits. He gets a young padawan to witness his signature. He then scans the documents and sends them back to the Kaminoans.
They confirm receipt of the documents and ask him to make the transfer via subspace transceiver to their company account when ready.
Yoda focuses all his good intention as he makes the transfer to their account. He receives a message indicating that his funds have been received with gratitude.
Some time later Yoda receives his share certificate which he stores away in his records in the Jedi Temple, awaiting the day (with light sabres crossed) when the company exits and he can dispose of his shares at a far higher valuation than the one at which he bought them.
As the company was registered for SEIS Tax relief, Yoda receives the relevant form from the company a few months later.
So aside from claiming his tax relief, now all there is left for Yoda to do is to sit back and read the updates he regularly receives on the company’s growth…
How does the investment end?
Kamino Clones Ltd grows quickly and, due to fraught political conditions, signs a huge contract with the Galactic Republic to build their armies; the value of this contract increases exponentially as more and more troops are required to deal with Separatist threats across the Galaxy, thereby pushing the valuation of Kamino Clones Ltd ever upwards.
At the height of the superiority of the Clone armies, Kamino Clones Ltd receives a buyout offer from The Dark Side Ltd who are so impressed by Kamino Clones’ rapid growth and perfect synergies with their own business that they are prepared to pay any price. Kamino Clones accept the huge offer and once the deal is finalised, Yoda’s share value is realised at the sale valuation and he makes a huge multiple on his investment. As for bringing balance to the Force…
Obviously, each time an investor invests in a startup, there will be a slightly varied timeline, documents will have slightly different names, and things might be received in different orders. But, as a general framework, Yoda’s experience in the example given is reflective of what you can expect each time you invest in a startup:
Offer made (by investor)
Offer accepted (by company)
Legal documents and investment agreement sent (by company)
Legal documents and investment agreement checked, signed and returned (by investor)
Company advises that it is ready to accept the transfer of funds
Investor transfers funds
Investor receives Share Certificate
Investor receives Tax Relief form (if applicable)
Investor receives updates on company progress
Company exits and investor receives huge returns (hopefully!)
With the mechanics of investing as simple as that and the ease with which you can follow more experienced investors, if you’ve done your due diligence, properly, the only real difficulty is making sure you have sufficient cash to invest (see iii. Due Diligence) and that you can pick the right company in which to invest (see ii. Deal Evaluation).