Angel Investors are high net-worth, accredited investors* who, typically, have acquired wealth from decades of business success. They use a portion of their investment portfolios to provide emerging companies with seed and start-up capital through direct, private investments.
Their goal is to achieve higher returns than the public markets typically provide, and they are prepared to accept the higher risk involved.
Most angels are active investors – they mentor the companies in which they invest by contributing time and experience, as well as offering introductions to valuable contacts – because they enjoy helping entrepreneurs grow their businesses.
Most angels specialize in industries or technologies they understand, and invest only in companies within close geographic proximity. Angels may invest on their own, or with their peers, through an organized Angel Group.
Angel Groups are member-based not-for-profit organizations for accredited investors who live, work or have strong interests in a particular geographic area. These groups have many advantages. They provide investors with:
- Scheduled opportunities to assess quality, pre-screened, early-stage companies that are seeking capital;
- The ability to pool their funds with other Angels and spread their investments among several opportunities;
- A structured investment process called Due Diligence;
- Tools to support the investment process;
- A community of fellow investors with complementary skills and/or expertise; and
- Educational opportunities.
Joining an Angel Group
Members of an Angel Group must be accredited investors. As well, they are expected to invest a minimum of $25,000 per year in start-up companies (either as a new investment or follow-on investment in an existing company).
There is an annual membership fee that supports the operations of the Group.
The best way to evaluate if joining an Angel Group is right for you, is to participate in an Investment Meeting. GTAN encourages potential members to attend up to three Investment Meetings and, potentially, audit a Selection or Due Diligence session to learn about organized Angel investing.
Due Diligence Checklist
While Angel Groups provide members with a structured investment process (Due Diligence), members make their own investment decisions based on their discussions with potential investee companies.
During Due Diligence, it’s usual for members to look at a company’s business plan and other investment criteria. GTAN has prepared a checklist of the key factors that may be applicable in discussions with a company.
It’s important to remember that the checklist is only a guide, designed to help members have the appropriate discussions with entrepreneurs and their companies.
Depending on the stage or sector of the company, some factors may simply not be applicable. In other cases, there may be factors not covered by the checklist.
There are many ways to invest in a company – common equity, preferred shares, convertible debentures or warrants are the most popular structures.
Some Angel Groups have a preference for one investment structure over another. GTAN members typically like to be offered common equity or convertible debentures.
As well as the investment vehicle, there are other financing terms to consider such as the company’s valuation and investor rights.
GTAN has prepared a list of financing terms for members to use to evaluate, or better understand, the terms being offered by a company. The list is not meant to imply that a deal is a “good” if all the terms are present; and “bad” if they’re not. That evaluation depends on the specific situation. However, a member may want to negotiate for a particular term to be included, if it is not originally offered.
In some cases, the Angel investors may not be the lead investors. In these cases, the financing terms will have already been established by the lead investors. In this situation, GTAN’s financing terms help members evaluate the terms they are being offered.
There is a trend of companies wanting to use a Simple Agreement for Future Equity (SAFE) as the investment structure. A SAFE is similar to a convertible debenture in that money is lent to the company, with the money being converted to share ownership in the future. However, many terms that protect investors and encourage them to help the company are not included in a SAFE. Few GTAN investors will invest in a company a SAFE.
*In Ontario “accredited investor” is defined by the Ontario Securities Commission (OSC) and includes:
– An individual who, alone or together with a spouse, owns financial assets worth more than $1 million before taxes but net of related liabilities
– An individual, who alone or together with a spouse, has net assets of at least $5,000,000.
– An individual whose net income before taxes exceeded $200,000 in both of the last two years and who expects to maintain at least the same level of income this year;
– An individual whose net income before taxes, combined with that of a spouse, exceeded $300,000 in both of the last two years and who expects to maintain at least the same level of income this year
– An individual who currently is, or once was, a registered adviser or dealer, other than a limited market dealer
– Financial institutions
– Governments and governmental agencies
– Insurance companies
– Pension funds
– Registered charities
– Certain mutual funds, pooled funds and managed accounts
– Companies with net assets of at least $5 million
– Persons or companies recognized by the OSC as an accredited investor