The following is an important check list that every Angel Investor should go through before investment decisions.
As an entrepreneur reading this article, we at Venture Giants would suggest that you acquaint yourself fully with these type of hard hitting questions that you might expect from prospective Business Angel Investors interested in investing in you. Remember, you only get one chance to woo a business angel investor. Make it a good one!
This list is by no means exhaustive, but the questions are designed to uncover any red flags, and address personal issues that may arise during negotiation.
Using this Angel Investor checklist may well uncover some questions that you may not have thought of asking. These are some hard hitting questions primarily designed to bolster your due diligence efforts.
RISK vs REWARDS
Have you evaluated the total risk of loss on this investment, including the liability that may be attached when your initial investment is depleted? Could you be legally bound to put up more money in the future, and if so, have you factored this additional investment in your total outlay?
If the project involves development of a new product, process or other technical innovation, is there independent confirmation that it works?
Have all the regulatory requirements have been met?
If the business is operating at the moment, is it losing money? If so, have you accounted for the burn rate?
I know how much my investment will be diluted as a result of the founders getting an interest for their sweat equity.
Have the entrepreneurs invested an appropriate amount of cash in the project to ensure that there is an equal footing from your investment?
Do you know the level of involvement that is expected from you? If so, have you factored this in with your current schedule and is this feasible?
If you intend to be on the board of directors, would you be entitled to representation?
Do you fully understand the legal structure of the investment?
Will some or all of your investment be secured by assets in the company?
Is there adequate insurance in place for assets, key personnel and directors?
Are all tax filings (income tax, payroll, etc.) up to date and have these filings and related assessments been reviewed?
If the investment proposal is for an established trading company and is VAT registered, have you requested to look at all of the quarterly VAT returns filed, so you are not retrospectively liable?
EVALUATING THE PEOPLE
Do you know and trust the people making pitch to you. If not, perhaps confirming the entrepreneurs; reputation with credible third parties may be a wise precautionary measure.
Have you carried out history checks on the key milestones/claims of the business plan?
If you are investing in an established trading business, have you requested a copy of the key terms of employment, contractual and salary agreements for key personnel?
Have you carried out checks on current stakeholders, officers, directors and key professionals on the project?
Has your solicitor conducted corporate and personal searches on those involved in the opportunity?
OPPORTUNITY EVALUATION
Have you calculated your probable return of investment (ROI)?
How long has this opportunity been on the market?
What is the payback period for the investment?
Have you discussed the entrepreneur’s investment proposal with other Angel Investors?
Have you discussed the concept with other Angel Investors?
Is the financial plan, assumptions and turnover projections reasonable, factoring in Gross profit and Net Profit? If not, Venture Giants will always recommend the plan be reviewed by independent professional advisers.
Have you looked over all of the expenses, including breaking down labour costs?
Is the entrepreneur’s marketing plan realistic? Have you seen it? If not why?
Do you understand when the business is expected to become profitable?
Have you calculated when you would be able to expect return on investment in interest or dividends?
How and when will you get your capital back?
If you are purchasing equity, what type are you purchasing (common shares, preferred shares)? Have you spoken with your accountant/tax adviser in terms of the potential tax benefits/downfalls?
Are there warrants or share options attached?
Are you purchasing debt? If so, is it classed as subordinate debt or convertible debt?