Guide to working with business angels

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

• Prepare 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

You want to convince your business angel to invest in your plans. You can do this with a good pitch. Base the pitch on your business plan and show that your business is worth the investment.

Tips for convincing your business angel:

• Start with a personal story and show your enthusiasm.
• Use images and show your product or service.
• Explain what problem you are solving and who your target group is.
• Tell them who supports you (your staff, family and experts).
• Name your competitors and how you distinguish yourself from them.
• Give a realistic estimate of your market and figures.
• Tell them how you reach customers and what that costs.
• Clearly state how much money you need, what you need it for and what you are contributing yourself.
• Show what the investment will yield and how quickly.

2. Initial meeting

Has the investor shown interest in you? Then it's time for an introductory meeting. Discuss your business plan and revenue model. Also see if there is a personal connection between you and the investor. This is important because you will be working together for a long time. If necessary, ask the investor to sign a nondisclosure agreement (NDA). This usually does not happen at this stage.

3. Negotiation process

Now you will start negotiation. This usisuall takes a few months. Signing a non-disclosure agreement (NDA) is common practice because you will be sharing a lot of information with each other. Engage an advisor and talk to entrepreneurs who have already been through such a process. Ask your network whether the business angel has a good reputation. If you have any doubts, stop negotiations well in time.

4. Letter of intent

The letter of intent states that the investor wants to invest money in your business and under what conditions this will happen. A letter of intent often contains the following elements:

• The investment amount.
• Rights and obligations of both parties.
• Protection in the event of additional share issues.
• Resolutory conditions (for example, after due diligence).

5. In-depth due diligence investigation

The investor will want to assess the risks of the investment. For this purpose they will have an audit or due diligence carried out. Make sure you have all the information to hand. They will look at:

• financial figures
• market and competition
• product or service
• staff and partners
• intellectual property protection

6. Valuation

Together, you determine what your business is worth. There are various methods, such as:

• 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.

The investor receives shares in exchange for the investment. The % depends on how much money you need for your business and how much your business is worth. You determine this in the negotiations. For example: for an investment of €100,000 , the average percentage of shares is approximately 30%.

7. Laying down agreements

At the end of the negotiations, all agreements are set out in official documents, such as:

• participation and shareholders' agreement
• any loan agreement
• articles of association
• management agreement

After signing, the business angel transfers the money.

8. Working with your business angel

The signatures are on the documents and the money is in your account. From now on, you are responsible for ensuring that your business grows. The extent to which the business angel is involved varies:

• Not involved: you do everything yourself.
• Coach: advises, but is not involved in the day-to-day running of your business.
• Regularly involved: the investor expects regular financial updates.
• Actively involved: you make decisions together.

9. Exit strategy

The investor wants to make as much profit as possible when he withdraws from your business. Set out in the participation agreement the conditions and circumstances under which the investor may withdraw from your business (exit). For example:

• The business angel sells his shares to you.
• You both sell your shares to a third party.
• You bring in a new investor with the business angel's shares.
• An initial public offering (this does not happen often).

Get help and advice

Do you have questions about business financing, finding a business angel, and how you can work together? You can contact KVK or call the advisors of the KVK Advice Team: 088 585 22 22. Or consult the Financing Guide.