3. Angel Investing: doing your first deal

In the next instalment of her series looking at how to become a business angel, our writer in residence Jodie O’Keeffe has taken an in depth look at doing your first deal.

You’ve been to a pitch event, raised your hand to indicate interest in an investment opportunity, and now find yourself on a deal team. What next?

1. Pay attention

Expect welcome emails from the founder and deal lead with links to their data room, invites to a follow-up call and requests for deal team members to cover an area of due diligence. These are action points, so act on them and let the deal lead know your preferences early. For due diligence, you can gravitate to your own area of expertise or take on something new, perhaps with another angel. Areas to consider include: investment thesis, deal structure, people, product, market, competition, financials and exit strategy. These are the first steps to a deeper dive into the business you were impressed with at the pitch, and arguably the most interesting part of angel investing. You’re in the privileged position of learning how this fledgling business operates, of how the founders intend to materialise their vision. It’s fascinating stuff and you’ll learn a lot, if you pay attention.

2. Ask questions

Read the information in the data room and note down any questions. Take note also of any areas not covered or pertinent documents not uploaded to the data room and ask about it on the call, or sooner. In the data room expect to see some or all of the following, depending on the stage of the business:

· Corporate documents such as employee agreements, loans, insurance policies, articles of association, existing shareholder agreements, current cap table, board reports, EIS/SEIS advance assurance letter;

· Financial documents such as the financial model, year-end accounts, management accounts, tax returns, bank statements;

· Marketing documents such as marketing strategy, plans, competitor analysis, existing customer contracts;

· Intellectual property documents such as reports from IP lawyers, patents, trademarks registered;

· Product documents such as product roadmap, current status reports, manufacturing agreements, technical specifications, technology audit report and any other pertinent materials depending on the type of business;

· Team related materials such as resumes, description of previous experience and expertise, organisational charts, advisory board background;

· Pitch materials such as the pitch deck, business plan, and other supporting documents.

Be particularly thorough with your nominated area of due diligence and do your own research. Contribute your questions to the Q&A document. Remember you are gathering intel to make an informed assessment, don’t hold back and don’t forget to ask about the upside. These are early stage businesses and the founder may not have all the answers yet but being excited about what could be is an integral part of the process. Go to your deal lead for guidance if you need help.

3. Get on the call

Soon after the pitch event and once the data room has been shared, one or more conference calls with the founder and deal team will be scheduled. This is where you can gain more insight into the founder and her business, particularly in your area of due diligence. It’s immensely helpful and educational to be on the call. An important part of the due diligence process involves assessing the founder’s character and judgement. The way she responds to questions and engages in the process gives the group an idea of how she deals with people, how open and forthcoming she is and how she performs under pressure. The more time you spend in conversation with the founder as a potential investor, the more well-informed your investment decision will be.

4. Consider your soft commit

To make sure there’s a critical mass of interest in the deal, the deal lead will ask the team to give a ‘soft commit’ — the amount you’d be willing to invest at the end of a successful due diligence process. This helps the founder know where she stands and how much of the fundraising round your deal team might fill. A healthy soft commit from the group provides more leverage later in the process when negotiating terms. A lukewarm soft commit from the group might give the deal lead pause to reflect on whether the investor group and business are a good match after all. It’s better for everyone to know the level of interest early on. A soft commit is non-binding and may be revised upward or downward as due diligence proceeds.

5. Check in with the group

An investor-only follow up call is the time to report back to the group verbally, express any concerns, highlight the positives of the business and to workshop areas of uncertainty. Along the way the deal lead may have created a shared deal memo document, with sections relating to each area of due diligence. Share your findings, analysis and assessment with the group on this document. If you have areas of uncertainty, ask the group to reach out to its wider network, in confidence, to ask clarification from contacts with relevant expertise. The deal memo is a living document and may go through several iterations as the due diligence period progresses. Expect several follow up calls with both the founder and deal team, as well as plenty of email updates on deal status. The entire process can take several weeks, often longer, and while it’s crucial to be thorough, keep in mind the founder will have a deal close date in mind and will be keen to get on with running the business. Fundraising is very time-consuming and distracting for founders, so try to maintain momentum during the due diligence period and use the deal lead as the main point of contact where possible, instead of the founder.

6. Lean on the team

Each investor is responsible for her own investment decision, but a curated network of investors offers skills and insight you’d otherwise pay for. Full participation in a deal involves a solid contribution from all deal team members. If you’re no longer interested, even after giving a soft commit, let the deal lead know as soon as possible and give feedback on why you’ve changed your mind. If you’re still keen, actively engage. This is a highly rewarding part of the process, where you get insight into other angels’ investment rationale and refine your ideas on what the business needs to succeed. Deep in due diligence is when the network comes into its own, when the whole becomes greater than the sum of its parts — contribute your part and benefit from the contribution of others.

7. Sign and pay

Once the due diligence is complete, terms are agreed and the whole round is in place, you’ll be asked to confirm your commitment and the paperwork will be processed accordingly. Final versions of the legal documents will be sent for you to sign, such as the Subscription and Shareholders’ Agreement (SSA) and Deed of Adherence, along with instructions for transferring your funds. Transfer payment, allowing a few days for processing, and send a remittance advice to the deal lead when done. The business you’ve invested in will send you a share certificate, as well as an EIS3 or SEIS3 certificate if eligible. Congratulations, you’ve just done your first deal!