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Seed Investments - a return to a simpler time?

Posted on Jan 05, 2014 by Kenny Mumford  | Tags: investor, investment, startup, angel investors, investment agreements, seed investment  | 0 Comments

Sometimes with investment work I wonder if I am witnessing a mini-trend or just a coincidence.

I’ve asked myself this before when I’ve seen a bit of a relaxation in relation to good and bad leaver provisions. 

The same thing has happened with a closer alignment of investor and founder interests on return of capital provisions.

At the moment I’m helping a few companies in early discussions with angel investors who are far from naive but who don’t feel the need for fully comprehensive investment agreements and don’t expect to have any real influence on the company’s activities going forward.

They might have funds to invest of between £5k and £50k and are interested in making a tax efficient high risk/high reward investment.  They are probably “cash rich but time poor”.

It takes all sorts of investor to make up a healthy investment ecology and while there are clear advantages for an early stage company in finding “no fuss” seed investors, there can be other challenges in finalising the discussions and the investment structure.  This can be particularly challenging when company valuations remain highly subjective and a number of unconnected co-investors need to be brought together.

Aside from getting the investor across the line on the “big idea”, a few useful questions for potential “no fuss” investors might include the following: 

What are you investment parameters / criteria?

  • minimum and maximum amounts invested and percentage of equity expected;
  • minimum and maximum deal sizes;
  • expectations of follow on funding rounds and future exit;
  • attitude to investing alongside similar co-investors;
  • any red flags or specific areas of concern when investing.

Do you have a preferred manner of investing?

  • do you tend to use your own lawyers or are you happy to be led by the company and its advisers;
  • would you expect to be a party to a Shareholders’ Agreement;
  • would you expect to use legal documentation that goes beyond a Shareholders’ Agreement and uses a comprehensive Investment Agreement which might include extensive investor orientated provisions, as used by professional equity investors;
  • would you be content to subscribe on the basis of a relatively simply “private placing” offer document.

What further information to you feel you need before making a final investment decision?

  • updated financial projections;
  • a full Business Plan;
  • anything in relation to EIS/SEIS qualification;
  • drafts of any proposed legal documentation;
  • any particular preconditions to be satisfied.

Are there any timing considerations?

  • is there a particular period in which you want to invest, perhaps driven by the need to complete in the current tax year;
  • would your investment be made via any Self Invested Personal Pension or any other investment vehicle that might need to be taken into account when dealing with the mechanics of closing an investment;
  • are you familiar with the anti-money laundering checks and Sophisticated Investor and/or High Net Worth certifications commonly required for this kind of investment.

Are there any “value add” aspects to your investment which it might be useful to factor in?

  • do you bring any sector specific expertise that you think may be useful and capable of being made available;
  • do you bring any industry contacts that you think may be valuable;
  • does the potential investment have any strategic value alongside any of your existing investments;
  • do you have general expertise in the high growth company lifecycle which might be relevant

Are you an investor that has used fully comp legals in the past but has reverted to a more hands-off approach?   Would you recommend it?

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