Guide to working with business angels

Go through the steps for a good partnership with your business angel:

• Make sure you have a strong pitch
• Initial meeting
• Negotiation process
• Letter of intent
• In-depth due diligence investigation
• Valuation
• Laying down agreements
• Working with your business angel
• Exit strategy
• Enlisting help

1. Make sure you have a strong pitch

If you want to win over a business angel, you will need a good pitch. You will need to back up your pitch with a strong business plan. The purpose of the pitch is to convince the investor that you are worth investing in.

Tips for convincing your business angel:

• Start by giving some background and sharing a bit of personal information before discussing your plans.
• Demonstrate passion and enthusiasm.
• Use images in your presentation and show the product or service.
• Show the problem which your product or service resolves.
• Explain who is supporting you; for example, your employees, family, and/or experts.
• Show that you know who your competitors are and what your competitive edge is over these rivals.
• Provide a clear description of your target group and make a reasonable estimate of your expected market share. Make sure the numbers add up.
• Explain how you intend to reach your target group, and how much this will cost.
• State how much money you need, what you will be using it for, and how much you will be contributing yourself.
• Try to make an accurate estimate of the payback period and returns on investment.

2. Initial meeting

At this stage, you have piqued the investor’s interest enough to get your foot in the door and schedule a meeting. At this meeting you will explain your business plan and business model. The meeting is also an opportunity to see if you and the investor have the right chemistry. It is important that you connect on a personal level, as you will be working together for some time. During the meeting, you will usually get a good idea of whether a follow-up meeting is likely. Although it is not common, you can ask the investor sign a nondisclosure agreement (NDA). Note that most business angels will be reluctant to sign an NDA at this early stage.

3. Negotiation process

The negotiation process consists of many intensive meetings. The purpose of the negotiations is to reach a deal; this process can take anywhere from 3 months to a year. At the negotiation stage, it is common to ask an investor to sign an NDA. This is because this stage requires you to be open and transparent and share a large amount of information.

It is a good idea to enlist the help of a specialised consultant, especially if this is your first time in this situation. Pick the brains of other business owners who have been through this process before. Use your network to find out about the business angel’s reputation. What is their track record? How trustworthy are they when it comes to honouring commitments?

Sometimes, it might help to temporarily suspend the negotiations so you can take some time out to think it all over. If you have serious doubts or second thoughts for whatever reason, trust your instincts. It is best to withdraw before it is too late, at the earliest possible stage.

4. Letter of intent

A key part of the negotiation process is the letter of intent. In this official document, you state that there is an intention to invest in your business and, if applicable, under what terms and conditions. The letter of intent often includes an exclusivity clause. This means that during the negotiation process, you will not conduct negotiations with any other potential investors. The letter of intent serves as the basis for the investment agreement (step 8).

Letters of intent often contain the following elements:

• the proposed investment amount
• protective terms for the investor in issuing additional shares
• the rights and obligations of both parties
• conditions for dissolving the agreement (for example, depending on the results of the due diligence investigation).

5. In-depth due diligence investigation

The investor attempts to estimate the risk associated with their investment and asks critical questions. They may conduct a due diligence investigation. These types of investigations, which are also common in corporate acquisitions, are more in-depth than regular audits. You can compare them to structural inspections when you buy a house. They cover the following areas:

• Financials
• Product/service
• Demand and market research
• Business owner and business
• Employees and partners
• Successes and failures
• Competitors
• Marketing and communications
• Intellectual property rights

Make sure you have as much information on hand as possible to answer any questions. The results of the investigation will help the investor to determine whether they want to go through with the investment, and under what terms and conditions.

Viewing tip: KVK Beyond Business

In the video ‘Business angels – Toen we ze lieten proeven waren ze onder de indruk’ (Business Angels – When we let them have a taste, they were impressed’, the ice-cream makers of IJsbaart share their experiences and tips.

6. Valuation

The business angel will try to make as accurate as possible an estimate of the value of your shares. Valuation is more of an art than a science, and there are no ‘right’ or ‘wrong’ valuation methods. Valuing a business is a case of give and take. Simply putting your own interests first is not good for your continued collaboration. This also applies to the investor. The following factors have an impact on the valuation:

• Is there intellectual property in the form of, for example, patents?
• What is the human capital in the form of knowledge and skills?
• How big is the market potential?
• What options are there for the investor to exit (that is, withdraw from) the deal?
• Are there any customers/regular customers or clients at this point, or letters of intent from potential customers/clients?

Valuation methods

There are three categories of valuation methods:

• Intrinsic value: The sum of the visible (including any excess value) economic property at any particular time. This is often not an option with start-ups.
• Profitability value: You can determine this based on the normalised profit expectation. This profit is derived from the past performance of the business, which is not an option with start-ups.
• Discounted Cash Flow method (DCF): This is generally viewed as the most objective method for determining the value of your business. The DCF method is based on your business’ future cash flows.

Determining the share percentage

The percentage of shares the investor will receive in exchange for their investment depends on your capital requirement and the value of your business. The investor is looking to be rewarded for the risk they are taking, and will demand a higher percentage of shares. You will determine this percentage during the negotiations. To give you an indication: based on an investment of approximately €100,000, the average percentage of shares is around 30%.

7. Laying down agreements

By the end of the negotiation process, all terms are set out in an official contract. When drafting the investment agreement, ensure that a potential exit remains possible in the future. The deal is only completed after the following documents have been signed. These documents must be drawn up by a solicitor:

• Investment agreement and shareholder agreement: this is a detailed document containing all the investment terms.
• Any loan agreement.
• Articles of association: the forms and types of shares are provided for in the articles of association.
• The management agreement: this provides for all other issues between you and the investor, including the rights and obligations of both parties.

The business angel will subsequently transfer the funds to the business’s bank account.

8. Working with your business angel

Once the documents have been signed and the funds have been transferred, it is all systems go. You and the business angel will be working on making your business grow. The extent to which the investor is involved may vary in terms of intensity:

• Little or no active involvement. In this case, you, as the business owner, will have to put in most of the work.
• Not involved in day-to-day operations, but available as a coach to assist you through their knowledge and network.
• Little to regular active involvement. The investor has limited time available and expects regular financial reports.
• Actively involved. The business angel puts a lot of hours into the business and is involved in the decision-making process.

This Dutch-langauge article, Tips from a business angel, has advice on how you can build a good collaboration. 

9. Exit strategy

The investor’s objective is to achieve the highest possible return on investment by the time they exit. The investment agreement must contain provisions describing under what terms, conditions, and circumstances an exit is possible. When you get to this stage, it is a good idea to enlist the help of an external consultant. Whatever you do, avoid rushing into things; as before, you will need to determine the value of your business.

Potential exit scenarios include:

• The business angel sells their shares to you.
• You both sell your shares to a third party.
• The share of the business angel is used to get another investor on board.
• Stock market listing (IPO). This is relatively uncommon,

Get help and advice

Professional help increases your chances of getting financing. With the right advisor and a good financial rationale, you are more likely to get a positive response to your funding request. These  financial consultants can help you get started. If you have a question about loans or other financial issues, you can contact the KVK Financing Desk.