The Angel CoFund works alongside syndicates of sector smart angel investors to provide equity investment into early stage, high growth UK businesses.
How it works
What type of business will the fund invest in?
Syndicates should be looking for the Angel CoFund to provide equity investments of between £100K and £1M into eligible UK SMEs.
The fund will provide up to 49% (although by preference will be a smaller proportion) of the capital in investment rounds ranging from £200K upwards. The size of the investment proposed needs to be significant enough to properly fund the business and to allow for the cost of proper due diligence and legal advice.
The investment needs to be a new investment for the syndicate, rather than supporting an existing investment, which will help to ensure that the syndicate and the CoFund’s objectives are broadly aligned. The CoFund will, to the extent possible, follow the terms of the syndicate including the structure and price of any investment. Once invested the CoFund will be able to make follow-on investments alongside syndicates into companies that are already within its portfolio.
Investee companies must also fall within the European Commission SME definition (headcount not exceeding 250, turnover not exceeding € 50M and balance sheet assets not exceeding € 43M).
Investee businesses can be from within any sector and whilst it is anticipated that the majority of beneficiaries will be early stage high growth companies, SMEs at any stage of their lifecycle will be considered providing they have the required level of investment from the angel syndicate.
The fund will, where possible, follow the investment terms proposed by the syndicate, including the structure and price of any investment and will invest in equity alongside other syndicate partners. It is anticipated that many investments will be compliant with the Enterprise Investment Scheme (EIS) but this is not a criteria for funding.
In order to ensure that investment objectives are aligned, the syndicate or its associates must not already have an interest in the investee company prior to the funding round (although it is possible that other investors in the overall round will already be investors in the business).
The Angel CoFund may not hold more than 30% of the total equity of the target company immediately following the funding round.
Syndicates and other investors may also be required to consider any applicable State Aid restrictions as a result of other investments.
Subsequent Funding Rounds and New Opportunities
The Angel CoFund is designed to participate in a syndicate in the same way as any other business angel and as such will be able to participate in all future investment rounds for the portfolio company. All follow-on investments will be subject to the approval of the Investment Committee.
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For each initial investment it makes the CoFund requires a partner syndicate of business angels (a Syndicate) to be investing on the same, or substantially the same, terms and to be willing to work closely with the CoFund both pre and post investment.
Syndicates do not need to be formally constituted and may form around a transaction where the members have agreed to invest, however, the Syndicate members should be actively engaged with each other prior to the investment and work together in terms of sharing due diligence and negotiating terms.
To qualify as a partner each Syndicate must comprise three, or more, private individual investors working in concert to invest, at their own discretion, a meaningful amount of cash (as a proportion of their investible wealth) into a business.
Angels within the Syndicate should be independent of the business at the time of investment, but may take on a non-executive role subsequent to it. They must be investing in the business for the first time and cannot be existing investors (any investment which an angel has already made in to a business, regardless of when it occurred, will be sufficient to make them an existing investor). However other investors in the round, outside of the syndicate, may be made up of a mix new and existing investors.
There is no requirement for a syndicate to have a particular legal form, but it must have the capacity to be counterparty to legal documentation, including a formal Syndicate Agreement, governing the co-investment relationship between the Angel CoFund and the Syndicate.
The Angel CoFund will accept proposals from syndicates that are supported by institutions, such as regional Business Angel Networks or Venture Capital / Corporate Finance houses, where those organisations can demonstrate alignment of interest with the CoFund and other investors and any potential conflicts of interest have been clearly managed. Those solely or largely incentivised by a fee contingent on completion of the investment will not be accepted as representing syndicates, and cannot partner with the CoFund, but will be welcomed more generally to support non-partner investors.
Where the proposal originates from an institution there remains a requirement for a “lead angel” to lead the proposition on behalf of the syndicate. This individual, as well as at least two private individuals in the Syndicate, should be investing a meaningful amount in the business at their own discretion. In instances where an institution forms the counterparty to the Syndicate Agreement they will need to be in a position, either directly or through constituent investors, to meet the obligations to report on the portfolio company and monitor its performance.
The Angel CoFund may decline to invest alongside any Syndicate where it believes its interests are not aligned with those of the Syndicate or it believes the Syndicate is unable to meet its requirements of a partner.
Where the Angel CoFund chooses to invest, a one off fee of 2.5% of the amount the CoFund invests will be payable to the Syndicate. This is considered reasonable as a payment for the investment monitoring and reporting activities that the syndicate is required to carry out on behalf of the CoFund. Additional fund raising or similar fees relating directly to the Angel CoFund portion of the funding round, on top of the 2.5% monitoring fee, are not in the spirit of the Angel CoFund and are as such prohibited.
In addition to the above the Syndicate may collect modest arrangement fees from the investee company on the CoFund contribution, where these relate directly to third party costs (e.g. legal fees). All fees will have to be transparent in the investment paper and the Investment Committee will reject a proposal if they feel that fees and charges are too high. The CoFund will have the discretion to share in any monitoring or other fees charged to the investee company on the same basis as other Syndicate members, if it is felt they are not proportionate to work undertaken by the Syndicates members.
Where a syndicate manager normally charges a carried interest or a similar performance payment on successful investments to other investors the Angel CoFund will consider supporting this and, so long as it reasonable and proportionate, allow it to be payable in relation to its investment.
The one off fee will be kept under review and some partners may want to accept a reduced fee to allow, for example, a larger share of carried interest (a success related payment).
The Angel CoFund invites investment proposals from syndicates where the members of a Syndicate have made the decision to invest but are unable to provide the entire equity funding requirement of the investee business.
At a transactional level the Syndicate will be responsible for sourcing investments, negotiating terms, undertaking (or commissioning) due diligence and monitoring / reporting thereafter, on behalf of both its investors and the CoFund.
At least one member of the syndicate should act as a “lead angel”, prepared to lead the process and be the principal contact with the Angel CoFund on behalf of the Syndicate. The lead angel is specific to the CoFund’s co-investment and may differ from the individual leading the overall investment round.
The lead angel will be expected to co-ordinate the preparation of Investment Papers for the Investment Committee of the CoFund and to present those papers. It is expected the lead angel should be able to draw on the support of other members of the Syndicate when preparing those papers.
In addition to presenting the investment proposal to the CoFund initially the Syndicate will agree to provide the Angel CoFund with monitoring information relating to the co-investments, although in most case this information will be provided directly by the investee company. This Syndicate will also be obliged to inform the Angel CoFund in relation to future investment or exit activity and share rationale for accepting any such offers.
Once partnered with the CoFund, syndicates are obliged to share future investment opportunities with the CoFund where they invest together as a Syndicate and those opportunities would qualify for CoFund investment. This obligation does not extend through the syndicate to individual members investing in a private capacity without other members of the Syndicate.
Following investment the Angel CoFund will, where possible, remain a passive investor following the syndicate on decisions relating to the investee company. In the majority of situations it will not expect to appoint a Director or attend Board meetings as an Observer (although it will always reserve the right to appoint an Observer and, under certain circumstances, may also request the right appoint a non-executive Director). The Angel CoFund will require the company to provide regular board papers, management & statutory accounts and other necessary documents in order to enable it to monitor the investment.
Indicative Legal Terms
When making investments the Angel CoFund (CoFund), as a co-investment fund, will generally look to adhere to existing legal documentation (Articles of Association of the Company, Shareholders Agreements or Subscription Agreements etc.), providing that documentation meets the minimum standards required by the CoFund.
The terms set out in the link below provide an indication of the types of rights and protections that the CoFund would generally expect to see in order to invest in a Company. Most of the items below are industry standard protections for minority investors, or reflect industry best practice for governance; however a small number are specific to the CoFund in order to support its internal governance.
All decisions to invest are subject to approval by the CoFund’s independent Investment Committee.
In order for the CoFund to make an investment, the fund’s Investment Committee will need to approve it. The basis of this approval will principally be the Investment Paper presented to the Investment Committee by the syndicate, along with any other appropriate supporting documentation.
The questions below set out some of the areas we might expect to see covered in an Investment Paper, and some of the due diligence that might have been undertaken to support a recommendation to invest. The exact detail of the investment paper and diligence should be tailored to fit the investment proposed and so not all of the headings below will necessarily be relevant.
Overview of the business – e.g. what the business does, its product or service. Is the product fully developed and market tested? A SWOT analysis of the proposal.
Management Team and Personnel – e.g. the experience of the management team, how are they incentivised and motivated? Strengths & Weakness in the team and how any weaknesses will be addressed. How well is the finance function managed?
Market – How big is the market? UK or International? Who are the actual and potential customers? What about competitors?
Market opportunity – e.g. what is unique or different about the product or service being offered? Why will customers buy it? How will this translate into sales?
Business model – what is the route to market, or means of getting products or services to customers, and how does the company achieve sales? How will manufacture be covered? What plans are there for expansion and future development?
Financials – How has the business performed historically? What are the financial projections for the business from a Profit &Loss, Cash Flow and Balance Sheet perspective? How might these vary with different sales, gross margin or investment scenarios?
Investment Structure – Who are the existing shareholders/investors? Who is in the proposed investment syndicate and what are their backgrounds? What is the proposed investment structure? Any special rights, warrants and options? What will the post investment balance sheet look like?
Post Investment – Are further funding rounds likely? If so when and for how much? Will other investors and the syndicate be able to follow on?
Exit strategy – how might investors expect to realise their investment?
A data sheet – it is useful to have the address, website, date of incorporation, directors and shareholders details, finance required and purpose, summary of structure etc. all in one place – usually at the front of the document.
Other things that might be helpful where relevant are:
Project Plans – detailing the roll out of initiatives, key milestones and the expectation for revenue generation.
Risk assessment – identifying key failure points for the proposed investment and how this might impact returns to the business.
The due diligence (DD) should support the investment paper and be focused on those areas that are crucial to the success of the investment, these are likely to include:
Commercial DD – Testing the commercial assertions put forward and assessing the businesses viability. Examples might be a test of the market’s size and level of competition and of pricing assumptions.
Referencing management and key personnel – references from other investors or business contacts etc.
Financial DD – e.g. testing the robustness of projections and accuracy of the modelled financials. Sensitivity to underperformance and robustness of assumptions.
Legal DD – this will normally be carried out by lawyers and should cover appropriate property searches, including physical assets, intellectual property, contracts, freedom to operate and any trademarks. It should also identify any potential liabilities arising from any on-going legal or regulatory action and any warranties and indemnities that have been given.
Where appropriate we might also expect to see:
Technical DD – e.g. an informed assessment of any new product or service to indicate that it can/will perform as specified.
Planning Reports – e.g. where access to or development of a physical site is a key part of the proposal.
Patent Documents – if a business has specified that it has patent protections we would expect it to be able to provide supporting documentation from the relevant patent offices.
Apply for funding
In order to apply for funding please complete the following form and attach a pitch deck and / or exec summary.
The Angel Cofund can invest between £100,000 – £1million and the Funds minimum round size is £200,000. The Angel CoFund will take up to 49% of the total round size however a typical investment is normally around 30% of the total round.
The Delta Fund can invest between £200k to £1million and the Funds minimum round size is £500,000. The Delta Fund can not take up more than 30% of the total round size.
SEIS is a generous tax relief targeted at companies that are generally too early stage for both the Angel CoFund and Delta Fund. In addition, both funds must have aligned economic interests with the new investors in the round. The significant tax benefits enjoyed by those applying for SEIS prevent this economic alignment of interest.
The Delta Fund operates a fast track process for more commercially validated UK businesses. It invests alongside lead angels with deeper sector knowledge who are making larger investments via equity or convertible loans.
- Minimum investment from Angel CoFund is £200,000
- The Delta Fund will take no more than 30% of the round
- The investment will provide the Delta Fund with fully diluted equity of at least 5% (typically 5 to 15%)
- There must be at least 3 new angel investors in the round including the lead angel who is making at least £70,000 commitment to the round
- The lead angel must have deep, relevant sector knowledge
- The company must have achieved a minimum of £100,000 revenue in the last 12 months
- The investment round will provide the investee company with at least 12 months cash runway
Both the Angel CoFund and the Delta Fund make follow-on investments and will consider proposals alongside angel syndicates where there is a strong commercial case to continue supporting a portfolio company. In general, the funds will follow-on to the extent the angel syndicate chooses to and in proportion to its existing investment.
However, neither the Angel CoFund or the Delta Fund is a ‘matching fund’ and therefore will not simply follow-on in relation to additional funds being raised in a new investment round. All investment decisions remain subject to Investment Committee approval.
The average early stage equity investment typically takes around 3 months from initial meeting to completion and this timeline would not be unusual for the Angel CoFund. The Delta Fund invests in proposals which have stronger commercial validation alongside angels with very deep sector knowledge and this can often streamline the investment process to allow a faster pace of investment.
Both funds tend to move at the pace of the syndicate and the round, which can vary significantly. There are a number of reasons why this can take longer than intended, but the most common sources of delay are:
- That the investor syndicate is not ready to commit or there is no lead investor;
- That insufficient capital is committed to meet a minimum level of investment;
- That due diligence has not been completed;
- That commercial or legal terms have not been agreed in detail with the company or other investors are disputing those terms; and
- That legal documentation is not suitable and requires changes.
The Angel CoFund and the Delta Fund both require a partner syndicate. To qualify as a partner each syndicate must comprise three, or more, private individual investors working in concert to invest, at their own discretion, a meaningful amount of cash (as a proportion of their investible wealth) into a business.
The syndicate should include one lead Angel investor with demonstrable sector expertise who is committing more than £40,000 to the round (for the Angel CoFund) or more than £70,000 to the round for the Delta Fund.
Critical to the investment model of both the Angel CoFund and Delta Fund is our economic alignment of interest with the lead Angel. If the lead Angel has previously invested in the business this economic alignment is not possible. In addition the insights that a lead Angel brings to a deal are a key part of our investment appraisal and it is therefore important that they are completing their own due diligence without being swayed by protecting a previous investment.
Business angels often have valuable skills and experience that can add significant value to investee companies and active participation is encouraged. However, this is not a precondition of Angel CoFund investment.
For the benefit and protection of all parties the Angel CoFund expects all investee companies to have appropriate legal documentation in place at completion of the investment. It will normally adhere to existing documentation, amended if required, and look to have a range of standard minority investor protections incorporated to protect shareholders interests (a schedule of these is available on request).
The Angel CoFund and Delta Fund both are focussed on working with active business angels who are committing their own capital following detailed due diligence of a particular proposal. Whilst both funds are very happy to invest alongside most types of fund, it cannot partner with or rely on diligence which is solely presented by a paid manager or individuals who are not investing personally.
Both funds aim to ensure that all investors receive an adequate level of reporting on the investee company’s trading, whilst trying to ensure no duplication of effort or superfluous activity.
The investee company will be required to provide, as a minimum:
- Management information – describing the trading of the business in the period, usually in the form of monthly Board papers;
- Management accounts – showing cash positions, P&L and balance sheet as well as performance against budget; and
- Statutory accounts – to be produced annually.
The Angel CoFund expects to engage with lead investors and the syndicate on a quarterly basis, or more frequently if circumstances require, in order to discuss the performance of the portfolio company. This meeting will commonly take place over the telephone, but may also be in person when convenient.
Both the Angel Cofund and Delta Fund will expect its legal costs to be met by the investee company (typically £4,500), unless other investors are meeting their own legal costs, in which case the Angel CoFund will do the same.
The Angel CoFund will pay a fee of 2.5% on its investment to the syndicate. The Delta Fund does not pay any fee to the investment syndicate.
Both funds will not accept any other fee being paid either directly or indirectly (by the company or otherwise) contingent on its investment.
Co-investors should feel free to negotiate any deal arrangement or advisors fees in relation to their own investment that they feel comfortable with, but these should be fully disclosed.
The assets of the Angel CoFund and Delta Fund are held in an independent company, limited by guarantee, with oversight and governance provided by an independent Board of Directors (who have been appointed by its Members). The management of investments and operations is provided by NCM Fund Services (an FCA regulated fund manager) with advisory services provided by Akero Capital Partners.
The Delta Fund will consider coinvesting alongside Angel investors who have previously invested in the business if they are proposing to participate alongside the Delta Fund with a convertible loan or Advanced subscription agreement.
The Angel CoFund and Delta Fund however will only co-invest in an equity investment where the lead investor and other members of the partnering business angel syndicate are completely new investors in the investee company at the time either fund invests. This stipulation relates to the need for the Funds and the syndicate to have an alignment of economic interest in the investee company and to avoid conflicts of interest (relating to, for example, the price of shares and exit time horizons).
Both funds can invest across the UK.
The Angel Cofund and Delta Fund may consider investment in businesses based outside the UK if the main benefit of their activity is in the UK, but this can only be determined on an individual basis.
Both funds will consider most investment structures, including ordinary equity, preferred equity, loans, convertible debt or any derivative thereof. However any investment must offer the capacity for an appropriate financial return relative to the risk being undertaken.
In any investment the funds will need to see a clear alignment of interest between it and co-investors, however it is envisaged and accepted that many investors will also be able utilise the Enterprise Investment Scheme (EIS).
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