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An Angel Investor checklist

Getting finance for your business isn’t easy, but you can increase your chances by ensuring you provide all the right information in your presentation (see our other post on getting finance). It doesn’t stop there however, you will also be asked a series of relevant questions in your meetings with any potential investor.  There are many entrepreneurs who prepare an amazing business plan, but are ill prepared for the meeting itself – don’t be one of them!

The following questions are taken from one angel investor’s checklist, used when deciding whether or not to invest in a business. Many of them should be answered in your business plan. Some might seem onerous and you might not get asked all of them, but if you are ready armed with good answers it could mean the difference between getting the money – and not. Remember you are asking somebody to entrust their hard-earned cash with you and your company so they are going to want to ensure they’re not throwing their money away:

An Angel Investor Checklist

  1. The company’s product / service
  • Do I understand the product / service and its use ?
  • If the product / service is in development at what stage is it ? … how long before commercialisation ?
  • What is its USP ?  What is its sustainable competitive advantage ?
  • Do I immediately perceive that it adds value / will fill a gap in the target market ?  Explain why (elevator speech !)
  • Is this a revolutionary product / service or does it already exist in the market ?
  • Is there an existing or latent demand for the product / service or does that  have to be created ?
  • Is it a “bought” product / service (e.g. a better mousetrap) or a “sold” product (e.g. life assurance) ?
  • Is the product / service opportunistic (short life) or durable (constant demand) ?  Will it be re-ordered ?
  • If the product / service already exists, who is the competition and how similar is their product / service and pricing points ?
  • What are the competition’s weaknesses ? How does the competition position itself in the market ?
  • Is the proposed price of the product / service competitive ?
  • Are raw materials readily available ?  Are raw material prices stable ?
  • Is the product / service easily scalable ?  In particular, can suppliers / subcontractors increase production in line with demand ?

1.14     Does the product need licensing / official approval ?   Has this been obtained ?  If still to be obtained, how long will it take and what will it cost ?

 

  1. Business plan and Due Diligence
  • Have the promoters drafted a professional / convincing business plan ? Obtain a copy
  • Has the investee company populated an online dataroom ? Request access.

 

  1. Intellectual Property protecting the product / service
  • Is the product / service protected by a patent, trade mark, design rights etc. ?
  • If so, does the company own these rights or are they licensed from a third party ? If the latter, check terms of licence (life, restrictions on sublicensing etc.,) and whether an adequate provision for royalties has been included in the budget
  • In the case of a patent, at what stage is registration ? What territories does the patent(s) cover ?
  • Does the investee company share its brand with any other business, even if the latter produces a different product / service ? How is use and quality of brand controlled ?

 

  • Marketing the product / service
  • Has the investee company developed a marketing plan ? Ask for a copy of the plan
  • What is the end-user target market segment (socio demographic) ?
  • What is the geographic market (UK only or exports) ?
  • How big is the potential market and what is the company’s potential share % ?
  • Is the market growing ? What are the factors behind this ?
  • Has the investee company done any test marketing ? If B2B does it have any testimonials ?   If B2C  has it undertaken customer surveys ?
  • Is the market reliant on or subject to Government policy or subsidy
  • Who will manage the marketing ? Has he / she already been recruited ?  Can we talk to them about their experiences  ?
  • What distribution channels / intermediaries will the investee company use ?

4.10      How will the product / service be marketed by the investee company e.g. face-to-face meetings, advertising, online, press ?

4.11      Has a realistic cost of marketing been included in the budget ?

4.12      Does the ex factory sale price to end user cost price look reasonable ?  What is the mark-up / GP % ?

4.13      Is delivery (logistics) of the product / service included in the sales price ?  Has this cost been adequately provided for in the budget ?

4.14      What are the terms of trade ? e.g. stage payment with order, during manufacturing, or invoicing full price on dispatch ?

4.15     Will the investee give customers credit terms ? How will they finance this … from working capital or invoice factoring ? If factoring, have they already arranged this ?

4.16     What is the procedure for checking the creditworthiness of customers ?

 

  • Cash-flow

5.1       Does the investment proposal include a cash-flow forecast for the next 3 years ?

5.2        Is the investee company currently receiving any revenue ?  Details, sustainability.

5.3        What is the current monthly cash burn ? Will this increase / decrease over the next 12 months ?

5.4        What is the investee company’s current cash balance ?

5.5         How much is the minimum / maximum subscription proposed for this round ?

5.6         For what purpose will the subscription be used ?  Working capital to cover cash burn or purchase of fixed assets ?

5.7         Is the proposed minimum subscription adequate for purpose or will it merely be swallowed by existing creditors (bank) ?

5.8         Who are the company’s bankers ?  Is the relationship good ?  Does the company have an overdraft / loan facility … details ?

5.9         If o/d or loan, how much is drawn down ?  What % of the facility has been used in each of the previous 4 quarters ?

5.10       Will the investee company need to raise another round of funds before an IPO. If so, when, how much and likely source / format ?

5.11       Does the investee company qualify for any grants, soft loans from Government ?  If so, when and how much ?

5.12       Are there any contingency plans in case the cash runs out ? (e.g. sale and leaseback of assets, JVs)

5.13       Are there any loans or other creditor balances requiring repayment before the company is ready for an IPO or trade sale ?

5.14       Are creditors reasonably up-to-date, especially payroll, PAYE, scial security, VAT ?

 

  1. Financial Statements

6.1         Date of year end ?

6.2         Who is CFO – qualifications and experience ?

6.3         How often are management accounts produced ?

6.4         Ask for last two years audited financial statements

6.5         Who are the auditors and is the audit report qualified e.g. going concern ?

6.6         How have development costs been accounted for – have they been capitalized and, if so, what is the amortization policy ?

 

  1. Management
  • Who is the main promoter ? What is his / her office e.g. CEO, Chairman etc ?  What is his / her background, experience and track record ?
  • Has he / she got proprietary knowledge / experience or is this shared with the rest of the management team ?
  • Is the promoter totally familiar with the numbers and customer profile ?
  • Is the company’s know-how stored electronically and backed-up ?
  • Is the promoter (and other senior executives) insured (key man) ?
  • How are the promoter (and other principal directors) tied into the investee company  g. personal investment (hurt money), contract / share forfeit ?
  • Ask for a management structure chart and ask to talk to other main directors COO, CFO, Marketing Director etc.,
  • What proportion of the equity do the executive directors hold ?
  • Ask promoter for a SWOT analysis
  • Is there currently or will there be a long term incentive plan for executive directors, which may result in dilution of equity investors ?
  • Ditto for pension scheme
  • Are third party equity investors represented on the board ?
  • Are there any independent NEDs on the board ? What do they contribute ?   Is the Chairman non executive ?
  • Will management undertake to provide monthly / quarterly management information to equity investors

 

  1. Capital structure and valuation
  •  Obtain a copy of the up-to-date Memorandum and Articles of Association.
  • Undertake a search at Companies House re shareholders, directors, latest filed accounts etc.,
  •  Is there more than one class of shares ?  If so, what are the rights attaching to each class ?
  • Which class of shares are now being offered for investment ?   What is nominal value of each share ?
  • Is there a shareholders’ agreement ? If so, review. As a new investor, will I become a party to this agreement (Deed of Adherence) ?
  • Who are the existing major shareholders (e.g. over 5%) ?
  • Does the M&A or the shareholders agreement contain or waive pre-emption rights ?  Can the directors issue new shares to whom they like, without first offering them to existing shareholders ? Obtain copy of any such resolution.
  • Has the investee company issued loan notes ? If so are they secured ? Are they convertible into ordinary shares and at what price ?
  • Are there any fixed or floating charges registered at Companies House ?
  • Given that the company is, presumably, not currently profitable and therefore a P.E. basis is inappropriate, who has estimated the pre-money and future valuations of the company and on what basis ?
  • What is the dilution effect of future fund raising ? Ask for, or prepare, a table for proposed funding rounds until IPO / sale in the format in Appendix

 

  •  Threats

9.1          Search the web for any adverse comment on investee company and promoters

9.2          Is the investee company involved in any litigation ?

9.3          Do the directors know of any circumstances which may lead to litigation (esp. breach of copyright) ?

9.4          Are there any claims from current or previous staff ?

9.5          Where is the company’s production facility / office ?  If leased on what terms ?  Will lease be renewed ?

9.6           Are there any supply chain threats e.g. a shortage or price volatility of raw materials ?

9.7           Is there any threat to product / service from changes in public sentiment or Government policy e.g. solar panels ?

 

  1. Investor exit
  • IPO, trade sale or sale to other investors ? Ask for approximate timing and estimated share value ? Has the company sought    professional advice on an exit ? If IPO, will shareholders be locked in for 2+ years ?
  • Where is the investee company tax resident ?  Will there be any local tax on the gain on sale of shares ?

 

  • Subscription
    • What could go wrong ?
    • Weigh the opportunity v risk.
    • Are there any conditions that we intend to attach to subscription e.g. a minimum aggregate subscription ?
    • Are the subscription monies being paid direct to the company or to an escrow holder (e.g. the company’s solicitor) to hold until any conditions are met ?

 

This checklist has been provided by Envestors, a Jersey and UK focused angel investor network. To contact Envestors give Ed Daubeney a call: 01534 705532 or 07797 749 355 or email: ed@envestors.je

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