Angel investor

How much money should I take out of my business?

Williams [and] Young Britt (LOC)

A common question asked by business founders and entrepreneurs is how much of the profit generated (after paying all expenses) they should leave in the company – or put another way:

“How much should I pay myself?”

Here are two scenarios:

William pays himself enough to live off, pay the bills and take the family away for a well earned holiday abroad each year. The remainder he leaves in the company to strengthen its balance sheet and reinvest in new products, services and people as the opportunities arise (as well as protecting against a sudden unexpected ‘black swan‘ downturn in the market). William is mindful of the risk that carrying too much cash could interfere with the trading status of his company in the eyes of the tax authorities and this is kept under review by his trusted Wing-Man (his accountant).

Meanwhile, Harry strips the majority of the cash out of his business each year leaving some to protect against downturns. He works with his accountant Wing-Man to manage the tax efficient extraction of the profits to avoid any unnecessary tax leakage.

Which strategy is right?

It depends on the goals and aspirations of the founders plus the opportunity cost of either extracting or leaving the cash in the company.

As an entrepreneur you are both a wealth creator and an expert capital allocator. So you must have a plan as to the optimum way you can deploy and allocate the wealth you create for maximum future returns.

If you adopted William’s strategy and stripped most of the profits out you had better have a good plan as to how you are going to deploy that cash to get the best return on your capital. For example, are you going to invest in new ventures, back some promising entrepreneurs as a business angel (SEIS might be of interest?) or perhaps invest in property?

Leaving the cash on deposit in your current account is not a good strategy.

On the other hand, if right now you see plenty of opportunities to get a good return on your capital in the business then leave it in there and take some small bets on new products, services or other initiatives and build from there.

Back to the question and answer: it depends.

There is no definitive answer as it depends on a number of factors including:

  • your goals
  • where your business is up to in its lifecycle
  • what opportunities exist inside your business
  • what opportunities exist outside your business

Always good to discuss your personal strategy with a trusty Wing-Man….

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Seed EIS (SEIS) – 10 need to know facts for UK start-ups

The introduction of Seed EIS (SEIS) is a major break-through for early stage companies seeking funding.

Here are 10 need to know (N2K!) facts for start-up founders on the new SEIS scheme:

  1. SEIS allows investors in early stage companies to receive 50% income tax relief on investments up to £100,000 per year. So for every £1 invested, HM Revenue & Customs will refund 50p regardless of their rate of income tax!
  2. SEIS investors will pay no capital gains tax on ultimate disposal of their shares so long as the company remains as a qualifying SEIS company for 3 years. So even if your business turns into tomorrow’s Facebook, the investors will not pay a penny in capital gains tax on ultimate exit!
  3. There is an added bonus for investors between 6 April 2012 – 5 April 2013 in that they can reinvest any gains crystallised in the year and wipe out the gain completely – so say an individual sold a rental property in the year and realised a profit / gain of £100,000 they would normally be liable to pay up to £28,000 capital gains tax. However, they could reinvest this into a SEIS investment instead and receive 50% income tax relief plus eliminate the taxable gain entirely – this equates to a whopping 78% tax relief or, put another way, a 22p in the £1 investment cost…..!
  4. Your company must have commenced trading within the past two years to qualify for Seed EIS – remember this is aimed at early stage companies only – and must be unquoted (AIM and PLUS listings count as unquoted for these purposes)
  5. Companies are limited to raising a maximum of £150,000 under SEIS – after this, they may be eligible for SEIS’s Big Brother, EIS, provided 70% of the SEIS cash has been spent (…!)
  6. To qualify for SEIS, companies must have less than 25 employees and gross assets of £200,000 or less (before the investment round).
  7. Early indications were that SEIS would apply to loans to startups as well as subscription for shares but the rules as implemented restrict the relief to subscription for ordinary shares only.
  8. There are material interest limits (30%), certain trades are excluded and there are a fair few stumbling blocks for the unwary as the rules largely mirror EIS.
  9. You can obtain advance assurance on whether the company is a qualifying SEIS company from HMRC.
  10. It applies from 6 April 2012. The legislation states that it will run for 5 years so to 5 April 2017 but hopefully it will be extended.

This is a great opportunity for start-up founders to access much needed capital at a time when traditional sources of bank and grant funding are thin on the ground.

Please drop me a line if you would like some assistance in navigating the SEIS or EIS rules either as a company founder or business angel investor.

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Access our free webinar: SEIS / EIS: Navigating Traps for the Unwary

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10 tax tips for fast growth companies seminar

I am looking forward to co-hosting a seminar at lunch-time today on:

10 tax tips for fast growth companies

The seminar is pitched at companies from startups through to more established companies as we walk them through the sorts of tax issues and opportunities they should consider as they seek to grow profitable companies.

We will be holding the event at Manchester Science Park (MSP) Innovation Centre in Salford and a key focus will be on cash preservation which is a key issue for growing companies – as cash is the lifeblood of every successful business.

The sorts of issues we will cover include:

  • Pros and cons for founders in funding their companies via share subscription v loan
  • How to attract business angel investors and take advantage of investment tax relief like EIS and the forthcoming Seed EIS
  • Why paying key staff salaries and bonuses is expensive and a better more cost effective all-round solution
  • How a potentially lucrative tax incentive might benefit your company and how HM Revenue & Customs (HMRC) might even pay you for the privilege of claiming it!
  • How to pay yourself tax efficiently
  • Heads up on a new tax incentive that is on the horizon and could save your company £££s in tax if you get your ducks in a row now
  • A simple way for start-ups to slash your employee wage bill
  • How VAT could actually make you some money!
  • How you could save a theoretical £1.8m if you are growing your business for sale in the near future

We will run through these points over lunch today and it would be great to see you there. The event is free. Yup, free.

Happy to run this event elsewhere or online vian a webinar if this is of interest.

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EIS & EMI – Happy marriage or grounds for divorce?

Incentivising key employees by giving them an equity interest in the company not only makes sense from a motivational and employee retention perspective but it also makes good financial sense when cash is tight and tax can bite nastily on cash bonuses.

Many UK growing companies will qualify for the Enterprise Management Incentive Scheme (commonly referred to as EMI) which is a tax favoured share option scheme which allows qualifying companies to allow selected employees to share in the success of the company, perhaps on an exit.

Growing companies that qualify for EMI may also qualify for EIS (a similarly confusing tax acronym which stands for Enterprise Investment Scheme!). EIS is a tax break available to business angel investors in the sorts of growth companies typically favoured by EMI share option schemes.

There is normally no problem in a company acquring funding under EIS whilst incentivising key management or employees using EMI, however, one crucial point to watch is that EIS is only available in respect of new ordinary shares which do not carry preferential rights.  Care must therefore be taken to ensure that shares issued under an EMI scheme do not contain restrictions that might, by default, make the EIS shares preferential within the three year EIS qualifying period. If the the ordinary shares issued to the EIS business angel investors “become” preferred to the shares over which the EMI options are granted within the 3 year period then EIS status could be lost along with the tax breaks that go with it.

Ouch.

Although both EIS and EMI can form a happy marriage for most fast growing entreprenerial companies, they both contain strict conditions that must be adhered to if you are to avoid a potentially unsavoury divorce from your investors.

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5 tips for securing funding – Bill Morrow: Angels Den

Bill Morrow, founder of the Angel Network, outlines 5 top tips for entrepreneurs seeking funding from VCs:

  1. Make sure you can explain your business quickly and succinctly. If it takes you more than 5 minutes, then you’ve yet to get it nailed. Back to the drawing-board for you!
  2. Outline the pain that your product or service will solve.
  3. Explain how your business will solve this pain.
  4. Enthuse investors with the opportunity for growth and how you will achieve this – how will your business scale to achieve the 5x + return on investment for your investors?
  5. Set out clearly how you will spend the money that you are requesting.

Morrow also explains how it helps for entrepreneurs to “humanise” interactions with potential investors, where possible. If you can build rapport by indulging in a bit of chit-chat about the cricket or football etc then this helps build relationships beyond business.  After all, you may have to work with each other over a number of years, so its important that you can get on outside of business-talk.

Good advice. Listen to this podcast in full over at Smallbiz pod.

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7 tips for start-ups seeking VC funding

I’ve been reflecting on the key business learning points emerging from the BVCA’s excellent recent event Financing & funding the digital age held in Manchester on 16 September 2010.

It was a full day of fast moving panel discussions and keynote speeches that kept coming at a relentless pace until almost 6pm – plenty to chew over hence the delay in penning this summary.

There were so many ideas and tips to unpack that I’ve decided to run a series of posts covering different topics. First up is the comments made on VC funding.

BVCA Digital Age 1: 7 tips for start-ups seeking VC funding

  1. Start building relationships with VCs who specialise and invest in your chosen sector NOW – don’t leave it until you need a cash investment.
  2. Better communication is needed between both the VC and entrepreneurial community. There was much talk from tech entrepreneurs of the incredibly frustrating “long….slow…..No” from VCs (which was tacitly admitted by the VC panelists), however, there was sound advice in ensuring that you invest some time upfront to pick the right VC – this means studying each VC’s objectives for investment (does this fit with your business?), timeline for investment or where they are in the fund cycle (have they made any investments yet, and if so, any in businesses like yours?). This should save much time and frustration on both sides.
  3. Business plans are largely a work of fiction (as things rarely pan out the way you planned them) so don’t go crazy building huge singing-all-dancing plans, however, you still need one to set out the investable opportunity for VCs to get an initial idea. The point was made (and reinforced by an excellent post and VC panellist Nic Brisbourne) that the act of sitting down and preparing a business plan helps entrepreneurs hunker down and concentrate on the business model – how is this great idea actually going to make me and my investors money? Sometimes reality strikes home when it comes to calculating the sales v costs etc. See points 6 & 7.
  4. Concentrate on clearly defining the market need that your product or service will solve rather than how sexy your technology is.
  5. Dawning of microfunding? Lower costs of entry for building new tech businesses brings into question how much cash investment entrepreneurs might need and when? Put another way, entrepreneurs might now be able to reach a much more advanced milestone in proving the business concept using just “family, friends and fools’ money” than would have been possible a few years ago – the point of inflexion has shifted along the timescale – so does this represent the dawning of microfunding and a move away from traditional VC seed funding and the timing of subsequent rounds of investment?
  6. Merits of writing a business plan for startups seeking funding is best summed up by the comment: “Execution focuses the mind”.
  7. Best of all, when you do approach VCs, present your business as “strategic opportunity” rather than a request for cash.
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Seeking Seed Funding: 12 tips for early stage startups

I was recently put on the spot at a Technology event and asked how much I would charge for assisting a tech startup in preparing a business plan to secure investment funding.

I answered “it depends”.

A cop-out? Not in my opinion. Why?

Because it depends on where you are in the investment cycle.

If you are seeking early stage seed capital then spending hours (and lots of cash on professional fees) on a detailed business plan will probably turn out to be a waste of time because most investment managers or angel investors will be interested solely in:

  1. the scale of the market opportunity and
  2. the commitment/enthusiasm/experience of you and your team.

The rest is all pie-in-the-sky – you know it and they definitely know it!

But as an early stage start up, how do you make the right first impression to be able to enter into meaningful conversations with potential investors and ultimately pave the way to attract venture or angel funding?

You need an introductory prospectus flyer or one-page teaser that hits the key points of interest to an investor. Getting the content and tone right is key.

Here are some of the key questions I think early stage start-ups should be addressing:

  1. What’s the open goal in the world that your product or service will  fill? Killer question demanding a killer answer.
  2. What is it that your competitors are not delivering or are incapable of delivering? (Don’t over flatter yourself. They are already up and running. You are not. Be courageous enough to acknowledge their strengths but pick out the areas where you plan to differentiate and thrive.)
  3. How would your customers describe the pain they are suffering and how does your product or service solve this? What would they do without you? (perish the thought!)
  4. How much more will it cost to get your product or service out to customers? Is it finished and ready to roll or do you need more investment in product development and research?
  5. Where has the technical know how come from? Are you entitled to commercialise the rights? e.g. Is it coding that you as founders developed yourself or have you used third party software or coding (other than open source)?
  6. How will you reach out to your customers? What is your planned mode of attack? Distribution channels? What will it cost? Is there anyone out there who you can partner with? If so, who? Be specific. Don’t say that you’ll rely on word of mouth or viral marketing or solely on some mode of social media. It could happen. That’ll be a bonus. But don’t hang your hat on it.
  7. How will you continue to grow sales or revenue without incurring a corresponding increase in costs? The posh phrase is “is it scalable?”. Investors like scaleable businesses. Why? The clue’s in the question.
  8. How easy will it be for others (especially your competitors) to copy you? Again, posh phrase is “do you have any barriers to entry?”. Barriers to entry might include technical know-how that could take competitors months or even years to crack – even better if you have patent protection. How much might it cost for your competitors to get up to speed? Would it be possible for you to set up quietly and hoover up a discreet market? You could them move onto another market niche or segment and another before the big players have cottoned onto this new challenger in their midst. This buys you time and the chance to build a fighting fund of cash and expertise before you go head-to-head…
  9. What’s the 3 – 5 year vision? Sure, things will change. You don’t have a crystal ball but you need a road plan with target dates and milestones. When will you break-even? When will you hit £X’000 revenue and profits etc?
  10. What are the big unknowns? What could go wrong and what steps are you taking now to mitigate these risks?
  11. Are there any other success stories in your sector? What values did they exit for and how quickly did they do it? Where did they make mistakes and what will you do differently?
  12. What’s your story? Where have you and your fellow founders emerged from? Do you have stories of previous success in similar sectors? Have you built and sold other businesses? Are you from a corporate role which is aligned with your new venture thereby giving you valuable inside track experience? Are any of the founders still in fulltime employment and what are the plans for taking this business to the next level? Investors will want to see enthusiasm, passion and ideally a proven track record of success and relevant experience. (Avoid flossing up your previous experience with overly grandiose claims. Stick to the KISS mantra – Keep It Simple Stupid!).

Concentrate your mind on these sorts of issues and it should save you a lot of time, effort (and cash!) in securing investor funding.

This list will no doubt keep on expanding but please suggest any other key criteria that you think is key for startups seeking funding.

Making BrITain Great Again – Intellect launch Technology Manifesto

Intellect launch their Making BrITain Great Again Technology Manifesto with a call for investment in supporting intellectual property rich (IP) technology companies in order, not only balance the books, but to rebuild a stronger UK business base for the future.

This technology manifesto identifies 4 types of technology business needing support and encouragement:

  1. Early stage tech start-up – great idea but need support, encouragement and investment
  2. Established technology companies – proven track record and growing
  3. Leading IT companies – becoming world players
  4. Global IT companies – already world players that we would like to see make the UK their home.

Key proposals that caught my eye in the 16 page report include:

  • simplifying the Enterprise Investment Scheme (EIS), including allowing entrepreneurs who participate directly in the running of the business to qualify for income tax relief – currently the legislation is designed to incentivise angel investors who are not the founders of the business to invest.
  • extending the Corporate Venturing Scheme from 20% to 30% tax relief in order to encourage investment by larger businesses into smaller tech companies. The manifesto points to the success of Silicon Valley investment by corporates into smaller businesses.
  • further simplifying the R&D tax credit regime to encourage further successful claims
  • careful monitoring of the UK corporation tax rate to encourage inward investment of overseas technology companies
  • ‘tax holidays’ for cluster areas of technology companies within designated areas or business parks.

I welcome this report as further progress on a growing body of recommendations and manifestos (e.g. Ingenious Britain and the Conservatives Technology Manifesto all released within recent weeks) that seek to put technology and other advanced emerging sectors at the forefront of growth for Britain – even better, they seek to achieve this by rethinking tax incentives and support mechanisms for these high growth sectors.

Download the report here.

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UK Innovation Investment Fund – Too little, too late?

Launch of the £200m UK Innovation Investment Fund could not come at a better time as funding for early stage technology, digital and life science companies continues to dry-up – worrying given that these are the innovative fast growth companies that our UK economy is relying on to dig us out of our UK budget deficit. Dow Jones VentureSource estimates that venture fund-raising for investment in early stage tech companies is down from 210 in 2005 to just 86 in 2010.

Although news of this additional funding is good for entrepreneurs and start-up ventures, there is a risk that it could be a long while before the cash trickles down to the fledgling businesses that need it most – like now! In the meantime, it is predominantly more adventurous private investors who are picking up the slack. A welcome form of microfinancing by microangels, perhaps?

Rather than relying simply on showering (further) State Aid, I do believe that we need to think more adventurously about introducing further tax incentives for our exciting and innovative new start-ups. This could also provide further stimulus for smaller (but welcomed) financing from private investors who can match the risk against tax incentives even with smaller (micro)investments.

Consider that there is currently no difference in UK capital gains tax payable between selling a property or shares in a start-up company as an external investor (CGT rate of 10-18%).  Does this accurately match the risk / reward? I think not.

Consider also that there are murmurs of a Conservative government removing the highly valuable R&D tax credit incentives in order to simplify the corporation tax main and small company rates – where is the incentive to break the mould and create game-changing businesses under this policy?

At least announcements were made in the Pre-Budget Report that we should see a lower rate of corporation tax for patent income but this is delayed until 2013 at the earliest – this is assuming it doesn’t get derailed prior to implementation in the same way that the Broadband Tax might (see further below)!

We need more support for UK innovative businesses. We need it now.

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