Angel investment

A business angel is a private individual who invests their own money in an early-stage company in exchange for shares. Angels invest alone or in syndicates, and in the UK they will ask whether your shares qualify for the Seed Enterprise Investment Scheme (SEIS) or EIS, because the tax relief changes their sums.

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How angels invest

Business angels are private individuals who invest their own money in young companies in return for shares. They come in after the founders and the people closest to them, and before the larger venture funds, so angel money pays for the stretch between a working idea and a business with enough customers to interest a fund. Each angel decides for themselves. The person you pitch to is the person who says yes or no, with no investment committee behind them.

An angel who has built or run a company brings contacts, sector knowledge and a sounding board for the founders alongside the cash. Some angels invest only in sectors they know; others follow a particular founder or a region. How much each one puts in is their own decision.

Two tax schemes shape UK angel investment. Under the Seed Enterprise Investment Scheme an investor can claim income tax relief of 50% of what they invest, on up to £200,000 a tax year. Under the Enterprise Investment Scheme the relief is 30%, on up to £1 million a year, or £2 million if at least £1 million of it goes into knowledge-intensive companies. Both need the investor to hold the shares for at least three years. Before an angel commits, expect to be asked whether your shares qualify and whether HMRC has given advance assurance.

The schemes decide the shares you can offer. Under section 173 of the Income Tax Act 2007, an EIS share must be an ordinary share with no preferential right to the company’s assets on a winding up and no right to be redeemed. In a seed scheme or EIS round, angels therefore hold ordinary shares, the same class as the founders, and protect their position through the shareholders’ agreement. Some angels lend through a convertible loan that turns into shares at the next round. A loan does not qualify for either scheme’s relief, which is given on shares.

How an angel round runs

  1. 1

    Approach

    Find angels who invest at your stage and in your sector, through angel networks, introductions from your accountant or lawyer, accelerators, and a funding search through Swoop.

  2. 2

    Pitch and meetings

    Angels read the pitch deck, then meet the founders, sometimes at a network’s pitch event. They ask about the market, the product, the numbers and what the money pays for.

  3. 3

    Terms and checks

    The lead angel agrees a term sheet with you: the amount, the valuation, the share rights and any board seat. Checks follow on the accounts, contracts, intellectual property and cap table.

  4. 4

    Completion

    Each angel signs the subscription agreement and pays. The company issues the shares, updates its register of members and files form SH01 at Companies House within one month.

Software developers working together at their screens

Syndicates and angel networks

A syndicate is a group of angels investing in the same round on the same terms. One of them, the lead angel, negotiates the terms, runs the checks and may take the board seat, and the others follow on the strength of that work. For the company, a syndicate means one negotiation, one set of documents and a larger sum than one angel alone would put in.

Angel networks bring investors and companies together. They screen applications, run pitch events and, in some cases, manage syndicates and the paperwork. Some charge the company a fee to apply or pitch, or a percentage of the money raised. Ask what the network charges, and what it does for the fee, before you sign anything.

The UK Business Angels Association is the trade body for angel and early-stage investing. Its member directory lists angel networks, syndicates, funds and support organisations, and is a starting point for finding networks that invest in your region and sector.

  • One lead angel negotiates for the group
  • Followers invest on the same terms
  • Networks screen companies and run pitch events
  • Ask what any network charges before you pitch

What an angel expects from you

An angel buys a minority stake and has no say in the day-to-day running of the company, so their protection comes from information and from a few rights written into the shareholders’ agreement. Expect to agree to send regular updates and management accounts, monthly or quarterly, and the annual accounts when they are filed.

The lead angel will ask for consent rights over a short list of decisions: issuing new shares, changing the articles, borrowing above an agreed level, selling the company or its main assets, and raising founders’ pay. They will also want pre-emption rights, so they can buy their share of any future issue and keep their percentage if they choose. Section 561 of the Companies Act 2006 gives existing ordinary shareholders the right to be offered new shares in proportion to their holdings, and the articles for an investment round set out how that works for each class of share.

Angels back founders, so they want the founders to stay. Leaver provisions in the articles or the shareholders’ agreement say what happens to a founder’s shares if they leave early, and some angels ask for founder shares to vest over a period of years. An angel also wants a credible route to selling their shares, which in practice means a sale of the company or a later round at a higher price.

Check the scheme rules before you agree to an angel joining the board. An investor who, with their associates, holds more than 30% of the company is generally barred from the relief. Under the seed scheme an investor can be a director and still claim. Under EIS, an investor who is a paid director is restricted unless the payments are of a kind the rules permit.

What to have ready before you approach angels

Rules on promoting your round

Sending a pitch deck that invites people to buy shares is a financial promotion. Section 21 of the Financial Services and Markets Act 2000 prohibits anyone from communicating one in the course of business unless they are FCA-authorised, an authorised firm has approved it, or an exemption applies.

The exemptions used in angel rounds cover investors who have signed a statement that they are high net worth or sophisticated, on conditions set in the Financial Promotion Order. Angel networks and syndicate platforms that are FCA-authorised deal with this for the companies they show their members. If you approach angels directly, ask your lawyer which exemption you are relying on and keep the signed statements.

You can talk about the business to anyone. The rules govern the invitation to invest, so let the regulated network, the platform or your lawyer manage who receives it, and keep a record of who was sent the deck.

Investors under the schemes need a compliance certificate from the company to claim their relief, and the company can only issue one after HMRC has accepted its compliance statement. Under EIS the statement can go in once the company has carried on its qualifying activity for four months. Under the seed scheme it can go in after four months of trading or once 70% of the money is spent. File it as soon as the company qualifies.

Questions people ask

How much do business angels invest?

Each angel decides for themselves, and no official source sets a typical figure. The tax schemes set the ceilings that matter for planning: an investor can claim seed scheme relief on up to £200,000 a tax year, and EIS relief on up to £1 million, or £2 million where at least £1 million goes into knowledge-intensive companies. On the company side, the seed scheme caps what you can raise under it at £250,000 in total. A syndicate pools several angels to reach a larger round.

What percentage of my company will an angel take?

The stake follows from the valuation you agree. An angel investing £100,000 at a £400,000 pre-money valuation owns £100,000 ÷ £500,000, or 20%. Where several angels invest in the same round on the same terms, they share that stake in proportion to what each puts in. Later rounds will dilute everyone, so plan for them now; how much equity to give away shows the arithmetic.

How do I find a business angel?

Start with the member directory of the UK Business Angels Association, which lists angel networks, syndicates and funds across the country. Regional angel networks, accelerators, and introductions from your accountant, lawyer or existing investors are the other routes. A funding search through Swoop also covers angel investors. Look at what each angel or network has backed before, and approach those that invest at your stage and in your sector.

Do angel investors want a seat on the board?

A lead angel putting in a large part of the round may ask for a board seat or an observer seat. Angels investing smaller amounts expect updates and information rights. Before an investor becomes a director, check the scheme rules: a seed scheme investor can be a director and still claim relief, but under EIS a paid director is restricted unless the payments are of a kind the rules permit.

Is angel investment a loan?

Angel investment is normally a purchase of shares, so the angel’s return comes from dividends or from selling the shares later. Some angels lend through a convertible loan note, which turns into shares at the next funding round at a price set in the note. A loan does not qualify for seed scheme or EIS relief, which needs shares issued for cash, so an angel relying on the relief will subscribe for ordinary shares.

Can a company with no revenue get angel investment?

Yes. Angels invest before revenue, and the seed scheme is built for companies less than three years into their trade, with gross assets of no more than £350,000 and fewer than 25 full-time equivalent employees. Without revenue, the angel is judging the founders, the product and the size of the market, so the pitch deck and the forecast carry more of the weight.

Finance is subject to status and to the lender’s terms. A personal guarantee makes you liable for the company’s debt if it does not repay, and it can be enforced against your own assets, including your home. Nothing here is a personal recommendation.

Equity investment

Seed Enterprise Investment Scheme

A young company can raise up to £250,000 from investors who get 50% income tax relief.

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Advance assurance for the seed scheme and EIS

HMRC says before you issue shares whether your round is likely to qualify.

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Getting investor ready

Prepare the deck, forecast, data room and cap table before the first investor meeting.

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Equity investment

Selling shares brings in money with no repayments, in return for part of the company.

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