Equity Raising Process

Equity Raising Process

All the information contained hereunder can be viewed in our guide for Investors  - Investing in Private Companies Insights for Business Angel Investors

Investing equity in a private company is an all-consuming exercise for you as a private investor.

You have to be prepared to put in considerable effort into the process: before, during and after the actual deal is done.

‘A marriage with a planned divorce’

The equity process can be described as a marriage although a marriage with a difference, one with a planned divorce (the exit). Therefore, the level of commitment to this business relationship is high.

You are likely to want to join the board of directors of the company and take an active part in the development of the business.  Entrepreneurs will need to welcome this participation.

Since your investment is unsecured, you need to become very comfortable with the people you are backing.

‘Dating’ process

The process starts, to borrow the marriage analogy, with the ‘dating’ process.  This is about you building a robust business relationship with the entrepreneur.  

Like the real dating process, attractiveness helps build relationships whilst ‘neediness’ usually does the opposite. Ironically, when an entrepreneur actively asks you for money, it can come across as ‘needy’.  

When an entrepreneur goes into a meeting with you seeking money, he will often come out with advice instead. It might be that if an entrepreneur goes into a meeting with you seeking advice, he may come out with money. The former approach may be considered ‘needy’ whilst the latter is more attractive.

This means that the equity raising process is not like raising debt, e.g. a mortgage for a house purchase, which is more mechanistic.  

Tip: start the process of relationship building well ahead of when the money is needed

Understanding what you find attractive

Like any relationship, it is essential that you understand what you find attractive.

It is important that you decide what your personal criteria are when assessing an opportunity.  There is more about this later in this guide.

A typical angel investment process
Deal sourcing Deal sourcing can be proactive or reactive.  Most deal sourcing comes through members, through their networks and interactions with other players in the ecosystem
Deal screening Applications are normally centralised and managed with a software package (GUST is often used).  Initial screening can be informal (conducted by some members) or formal (conducted by a group or network manager)
Initial feedback/coaching Companies making the initial screening will be contacted and may receive some coaching regarding the expectations of investors and how to better present the company
Company presentations Selected companies may then be invited to present to the members at an event, normally held once a month.  Typically 2-4 companies present.  The investors then discuss aspects of the company and potential deal in a ‘closed’ session
Due diligence Due diligence is normally done on a formal basis and includes: a competitive analysis, validation of product and IP, an assessment of the company's structure, financials and contracts, a check of compliance issues and reference checks on the team
Investment terms and negotiations If members remain interested, term sheets need to be prepared and the company valuation negotiated.  Increasingly, angel groups and networks use standardised term sheet templates.  The company may present to the members a final time
Investment Interested members can then invest as an individual or form a syndicate to invest in the company.  The final documents are drawn up and a lawyer is usually engaged in the process.  There is a formal signing of documents and the agreed-upon funding is collected
Post-investment support After the investment, investors often monitor, mentor and assist the companies with expertise and connections.  In addition, the investors often work closely with the company to facilitate an exit at the appropriate time
    Source: OECD (2011a), summarised from ACA, EBAN and Tech Coast Angel materials

Source: OECD (2011a), summarised from ACA, EBAN and Tech Coast Angel materials

Time to investment

It can take a long time from initial discussions to the completion of an equity investment.  This can be up to a year or even longer.

Deals can and have been done much quicker than this.  A typical time frame is three to six months.

However, allowing a lengthy time period will help you.  You get to know the company, its markets and its management better the more time you have.

Investor commitment

As studies have shown, where there is significant investor commitment in terms of time as well as money then the prospect of success with enhanced returns is increased.

This commitment is before, during and after the deal.

Commitment after the deal is also important.  

Tip: You should commit to a non-executive director or advisory role but not an executive role.  

As discussed earlier, more involvement than an advisory role by you can lead to underperformance for the company as your contribution could turn from positive help to negative interference.  

An involvement of around two days a month can be optimal – however, circumstances may dictate (e.g. at another fundraising process, a senior recruitment, at exit, etc.) that more time is required on occasion.

The exit

The relationship ends with the exit. Any previous exit experience that you may have will enhance the returns for all shareholders.

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