Angel investment & fixed price financing for SMEs Graham Stedman 6 February 2012

The equity funding environment Seed capital – finance for research or prototype – up to £100k, usually from founders, friends and family Start up/early stage – research or prototype completed; evidence of customer interest or early sales; working capital needed for marketing, salaries, product development etc – up to £500k, usually from business angels Growth – generating sales but possibly still pre-profit; capital needed for marketing and operations to expand - £200k to £2m, usually from angels, family offices and VCs Expansion – established business generating profits; funding needed to develop new products and markets - £1m to £5m, usually from VCs

Moving things forward: what do you need? Business plan Key highlights (executive summary) Presentation Term sheet Due diligence pack NDA to protect your ideas

Why equity funding? No interest charges No fixed repayment date No personal guarantees Investor may add value with advice, skills and contacts Enhances ability to borrow Investor’s interests aligned with management Financial and reporting discipline useful for further financing or exit

Disadvantages of equity funding? Not suitable: low growth or lifestyle business Dilution (may be heavy in future funding rounds) It takes time and considerable effort Distraction from running the business Can you get along with the investor? Warranties on state of the business Investor consent required for key decisions Controls on remuneration Pressure for an exit in due course

Who are business angels? Private investors (high net worth individuals) Operating alone or in syndicates Typically £25k to £250k each per deal Often successful business people Can offer mentoring, skills, experience and contacts Tend to be hands on Tax relief (EIS and SEIS) can be a bonus for them More patient and less aggressive than VCs

Business angel organisations Offer access to many potential business angel investors Only use FSA authorised firms Will help with business plans and presentation training Useful barometer of success Up front fees to take you on Success fee (usually 5% of funds raised) Equity kicker (options or warrants)

The legal bit …. Criminal offence to market a business plan to someone the law deems insufficiently expert to receive it For angels: either get the plan approved by an FSA authorised firm or make sure they are self-certified sophisticated or high net worth investors before you send the plan Even so, the plan needs to contain specified legal disclaimers Useful exemptions for business angel organisations and ‘close circle’ investors

What are my chances and how long does it take? 2% to 5% of businesses seeking angel finance are successful Solid preparation and determination are vital From first preparation to money in the bank: be ready for months

How do I value my business? Pre-money valuation: current value before investment Post-money valuation: value after investment If an investor invests £500k at a pre-money valuation of £1m, he gets a third of the equity with a post- money valuation of £1.5m Beauty is in the eye of the beholder, but: –Pre-revenue seed businesses: between £350k and 750K –Early stage with some revenues (under £300k p.a.): between £500k and £1m

Catching the eye of an investor Plenty of advice out there about what investors look for The core questions: –What you do (simple description; give examples)? –What problem are you solving (quicker, cheaper, no other solution, more fashionable, desirable etc)? –Why would people pay money for that? –How many people would pay money for that? –What stops other people copying you?

What makes investors groan? Unrealistic valuation Laughable sales forecasts Too much/too little being raised Entrepreneur can’t sell Very qualified team but nobody driving Entrepreneur has other businesses Deal structure too complicated (e.g. founder shares) Too cute (e.g. IPR owned by entrepreneur and licensed to the business) Business needs significant future capital with heavy potential dilution

What should I do when I have found an interested investor? Move quickly: while the interest is still fresh Term sheet (balanced; not legally binding) Delivery of completed due diligence pack Following signed term sheet, get the legals out quickly (2-3 days) Work towards completion as quickly as possible after that (2-3 weeks)

What are the transaction documents? Subscription agreement Shareholders’ agreement New articles of association Shareholders’ and directors’ resolutions Warranted documents: –Final version of business plan –Signed and completed due diligence questionnaire –Founders’ fidelity questionnaires

Fixed fee completion service for early stage equity investments Business plan template (if you need it) Term sheet Due diligence questionnaire All legal documents for the investment deal Fee: £5k - £10k (£5k if don’t deviate from the term sheet and due diligence questionnaire) Contingent on raising the money