Prepare to make an angel investment: 3 vital steps

Becoming an angel investor isn’t just about throwing cash at the next “big idea” and hoping for the best. It’s about smart strategy, thorough research, and hopefully even a little tax relief cherry on top. If you’re ready to spot the next unicorn (or at least avoid sinking money into a donkey), here are three essential steps to prepare you for your next (or first) angel investment.

1. Define your investment strategy

Before you start looking at potential investment opportunities, take a step back and decide on your investment strategy. You don’t need to have every detail nailed down, but a basic plan can help you stay focused.

Here are some questions to ask yourself:

• How much can you afford to invest? Both financially and emotionally.
• How many investments do you want to make? Most angels spread their bets across multiple startups.
• What sectors or industries interest you? Is it tech, health, sustainability or something else?
• What stage do you want to invest at? Do you want to invest in pre-seed, seed, Series A, etc? Make sure you understand the different stages and what suits you best.
• What level of involvement do you want? Some angels take a hands-on role, offering mentorship and guidance, while others take a more passive approach.

Having a clear sense of direction helps you navigate the seas of investment opportunities with confidence and purpose.

2. Set yourself up for seamless SEIS/EIS tax relief

As an angel investor, you might be able to claim SEIS/EIS tax relief if the company and your investment are eligible. The UK government created the Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS) to encourage investors to invest in high-risk startups. Some of the benefits include deducting up to 50% of your investment amount from your Income Tax bill, no Capital Gains Tax on your profits and more.

You’ll need proper paperwork in place to claim your tax relief:

• Advance Assurance: this is pre-approval from HMRC so you know the investment is on-track to get SEIS/EIS. Ask a company to show you their Advance Assurance, so you can invest with more confidence.
• Share Certificates: after you’ve invested, make sure you’ve got your share certificates.
• SEIS3 or EIS3 forms: these are your golden tickets for tax relief claims.

3. Get your due diligence mindset on

Due diligence means researching and verifying the business you’re considering investing in. This step is crucial and can make or break your investment. Think of it like vetting a potential business partner or a new hire — you wouldn’t jump into it without thoroughly checking things out.

What should you focus on? Here are some pointers:

• The founders: do they have the skills, passion, and experience to make the business work? What’s their track record like?
• The business model: is there a clear plan for generating revenue? Does it make sense? Will it scale?
• Market potential: how big is the market for this product or service? Is it growing?
• Competition: who are the key competitors? How does this startup stand out?
• Financials: what’s their cash flow like? How long will the current funding last?
• Legals and compliance: do they have essential legal docs in place like IP Agreements and Founder Agreements? Does the company follow necessary compliance procedures?

Take your time here and don’t be afraid to ask tough questions. After all, you’re the one taking the risk.

Pro tip: nurture your network

As an angel investor, your network is your superpower. From co-investors to founders, building relationships will not only help you find the best deals but also increase your credibility as an investor. Join angel syndicates, attend pitch events, and keep your LinkedIn profile polished. After all, who you know can be just as important as what you know when it comes to angel investing.

A vibrant network gives you access to more opportunities and allows you to tap into shared knowledge. Plus, sharing the ride with other experienced angels can make the journey less lonely and more fun.

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