Angel investing is a form of early-stage investing where high net-worth individuals invest in startups with the potential for high growth. Angel investors provide capital to startups in exchange for equity in the company (or sometimes the promise of equity in the company), on the basis that they make a profitable return on their investment in the future. Though the market for Angels in the US has been booming for decades, in Australia there is still a lot of space for Angels to enter the startup landscape and make life-changing differences for both companies and themselves.
Becoming an Angel can also be a great way for high net-worth individuals to diversify their investment portfolios and support innovative startups, particularly in the technology, security and financial sector. In this post, which is the first of our 10 part series, we'll provide a comprehensive guide on how to get started as an Angel Investor, as well as some tips to help you stand out from the rest.
Understanding the Risks and Rewards
Angel investing can be a high-risk, high-reward endeavour. While some angel investments can generate significant returns, many result in a total loss of investment. It's important to understand the risks and rewards before investing.
To mitigate risk, we advise that potential Angels are willing to conduct the necessary deep-market research on all potential investments, including the company's business model, management team, financials, and competitive landscape. Additionally, angel investors should be prepared to invest in a wide portfolio of startups to diversify their risk.
There are no formal requirements to start angel investing, but there are some things you might want to consider. Any new Angels should take the time to confirm whether they meet the sophisticated investor test, which you can check here. In short, you can become a sophisticated investor through:
- a certificate from a qualified accountant;
- investing over $500,000 (either in one investment, or multiple investments in the same company)
- meeting the Corporations Act definition of a professional investor; or
- controlling over $10 million in gross assets.
Being a sophisticated investor makes you more attractive to startups, as it means they can more easily keep in line with the 2/20/12 test ($2 million, 20 shareholders, 12 months) and it helps them fundraise larger amounts without having to increase the number of shareholders on their members register (allowing them to benefit from the reduced reporting requirements of being a private, rather than public company).
Getting your structure right
Angel investors typically invest through an investment vehicle, such as a proprietary limited company, a trust, a self-managed superannuation fund or a syndicate.
Though we recommend seeking financial advice before doing so, structuring your investment vehicle can help mitigate your legal liability and provide tax benefits on your investments.
- Company: A company structure can offer a degree of asset protection for investors. Assets held in a company are separate from personal assets. In circumstances where you might accrue some legal liability for your investment, your personal assets, including your home, may be segregated and protected.
- Trust: A trust structure offers the benefits of proprietary limited company, with some additional tax advantages. For example, profits of your investment can be distributed to beneficiaries who are in lower income tax brackets, thus reducing the overall tax liability.
- Self Managed Super Fund: If you already manage your super through an SMSF, then it can also be effective to use that fund as your investment entity. It is important to be aware of and seek financial advice on the risks associated with this, however many investors find this a to be a helpful way of investing using money they already have.
- Syndicate: If you form a group of angel investors, you can invest in a company through a syndicate. In this case, the syndicate is only one shareholder on the Company member register and holds shares on behalf of a number of different angels, who can instruct the syndicate to make investments when they choose.
- Individual: Finally, you can invest in a company in your own name. They key advantage of this is that you do not owe any additional company obligations to ASIC, and are entirely in control of your share portfolio. However, it does expose you to a level of personal risk, and adds a few extra formalities when it comes time to sign your investment paperwork.
Other things to be aware of
Another great benefit of investing in an early-stage startup is the potential to qualify for ESIC tax concessions. If the company you are wanting to invest in is ESIC eligible (something we strongly suggest you check), then early investors who are most often angels can qualify for a carry-forward tax offset of 20% of their investment amount (capped at $200,000).
Additionally, if the company is ESIC eligible, and you hold shares continuously for a period of over 12 months (but not more than 10 years), you may qualify for modified capital gains tax treatment, whereby capital gains on these shares are disregarded for tax purposes. Not all high-growth startups will have confirmed their ESIC eligibility, but it is worth knowing about, especially if you plan to invest long term.
Angel investing is often about who you know. Prospective angel investors should network with other angel investors, venture capitalists, and entrepreneurs to build relationships and gain access to potential investment opportunities.
Attending industry events, conferences, and networking events can be a great way to meet other investors and entrepreneurs, but we also suggest you tap into your personal connections including financial advisers, lawyers and trusted friends. In addition, joining an angel investing group or syndicate can provide access to a wider range of investment opportunities.
To stay across startup news, we recommend an AFR Subscription and Startup Daily, though for free alternatives, ensure that you have a strong and professional LinkedIn presence, and subscribe to our weekly newsletter here.
Our List of Recommendations
For Angels who are just starting out, there are a number of resources available to help you navigate the angel investing landscape. Here are a few of our favourites:
- AngelList: A platform for startups to connect with investors, including angel investors.
- Australian Investment Council: A national association for private capital investors, including angel investors.
- Startup Network: An international organisation that promotes and supports the growth of the Australian startup ecosystem, as well as matches you with investment opportunities that fit your budget and needs.
Of course, before making any investments, you should seek financial and legal advice specific to your circumstances. Angel investing involves complex legal structures and agreements, and it's important to have a thorough understanding of the legal implications of your investment.
If you ever want to chat through any investment opportunities or need help getting your feet off the ground, we are here to assist, and can’t wait to hear more about your goals.