UK: Business Angel Investment and Shareholders Agreements

Last Updated: 7 December 2010
Article by Robert Matthews and Robin Hampton

So, you have weighed up the pros and cons and decided to seek business angel investment. How are you going to get investment? What perils await you? This note looks at the process and the key legal issues in securing angel investment.

Business angels are wealthy individuals who invest in high growth businesses in return for equity. Some angels invest on their own, whereas others do so as part of a network. In addition to money, angels often make their own skills, experience and contacts available to the company. Angels typically invest in companies which need between £10,000 and £500,000 where funding from traditional sources, such as banks and venture capitalists, is not available. Banks generally require security and most venture capital firms are only interested in financing much larger amounts.

Before finding your angel investor

There are plenty of things that you could be doing before beginning your search for angel investors to make your company more attractive and avoid obstacles further down the road. Angel investors will almost certainly have made similar investments in the past and will usually engage lawyers and accountants to review your books and records as part of their due diligence investigations of your company. Your company needs to be 'investment-ready' before due diligence begins. As a result, your company will appear well run and the investor will have more confidence in you and your company. Here are some common issues that can be addressed prior to due diligence:

  • shareholding structure - is your company set up in such a way as to enable investors to receive the tax benefits of the Enterprise Investment Scheme? This is often an important consideration for angel investors and can make or break their decision to invest, or lead to a lower valuation of your company. Are employee share options in place? Putting them in place at the same time as a proposed investment might have adverse tax consequences for the holders of those options.
  • customer contracts – do you have appropriate written contracts in place? Investors will want to see that the key customers and suppliers are legally tied in to a contract from which they cannot choose to walk away.
  • intellectual property - investors will want to be absolutely certain that any IP you claim to own is actually owned by your company, is defensible and secure. For example, key pieces of technology or software might have been worked on by a third party. If there is no written agreement with that person agreeing to transfer the relevant IP then it will be arguable that the third party owns it, not your company. Another common issue is that domain names are often registered incorrectly in the name of the person who had the credit card handy when the domain name was being paid for – that is often an employee (or former employee!) or the person who developed your website.
  • employee contracts - leaving aside the fact that employees are entitled to written information regarding the terms of their employment, investors will often want to ensure that key employees are properly tied in to your company and will expect to see enforceable notice and non-compete provisions. Asking employees to enter into formal contracts after they have learned about a possible investment often gives them the edge in negotiating with you.
  • business plan – angel investors will want to see that you have a clearly articulated strategy for the business over the next five years (with achievable milestones and a potential exit) and that management have a strong understanding of products and markets. You will need to prepare this carefully, as it essentially becomes your sales document and investors are likely to require that you warrant (i.e. promise contractually) that this has been prepared honestly and that you have prepared it based on reasonable assumptions.

The list could go on but the important point to note is that failing to put in place appropriate structures and document properly the company's internal and external relationships is likely to make the company less attractive to investors. One advantage of approaching a business angel through an angel network is that the network manager can (for a fee) help get your company investor-ready.

Initial process

Usually, the first step is for you to send a potential investor a brief summary of the investment opportunity (some angel networks will have a standard application form). You will need to be careful about who the document is sent to as there are strict rules about marketing the shares of any company – your angel network should be able to help you navigate that process. The summary document may or may not contain confidential information, depending upon the nature of your business. If the investor expresses interest there will probably be a number of meetings at which you will provide further detail or a presentation to the relevant angel network. In certain circumstances it may be appropriate to require the potential investor to sign a non-disclosure agreement to protect your company's confidential information from being exploited. (We have made available a precedent NDA at

Once the investor has sufficient information about your business, then either you or the investor will draft the heads of agreement (sometimes called a memorandum of understanding, letter of intent or term sheet) which sets out the key terms of the investment. There is no rule as to who prepares the first draft of the heads of agreement. The party with more bargaining power will normally decide, and would therefore choose to prepare the heads of agreement as it is advantageous to set the starting point for negotiations. The heads of agreement are usually expressed as not being legally binding – both parties should be able to back out of the transaction until the investment agreement is signed.

Due diligence

Due diligence takes many forms and can be done to different levels of intensity. Investors might be willing to invest based simply on their trust in the management team (and their warranties in the investment agreement – see below). However, that is often unlikely and usually investors will ask the management team a number of detailed questions concerning its management, accounts, customers, suppliers and prospects.

Dealing properly with the due diligence is likely to be time consuming. Having all the company's records organised and ready and contracts in place before the process begins should speed up the investment process and allow you to focus better on running your business.

Investment agreement (aka 'Subscription and Shareholders' Agreement')

Drafting and negotiating the investment agreement is the main area of input by lawyers and is where they can add the most value. Investors will often have their own preferred set of investment documentation and the convention is that the investors' lawyers will produce the first draft of the investment agreement; but that is by no means a hard and fast rule.

Investors will typically be looking for an exit from the company in three to five years and the investment agreement will govern how your company must be run during the period of the investment and form the backdrop to your relationship with your investor(s). The investment agreement is not there simply to cover what happens when something goes wrong. It will typically deal with the following issues:

shareholdings - investors will usually take a minority stake in your company but often take a class of share that gives them enhanced rights in relation to other shareholders. Shares have three main characteristics: rights to dividends, rights to capital and rights to vote, all of which can be apportioned differently between different types of shareholder. For example, the investor may take a class of share that gives them a right to take dividends before the management team and a right to an enhanced capital return.

management control - investors will usually not want to be involved in every decision taken by the company but are likely to want a seat on the board and a right to veto a number of key operational matters. There will typically be a list of 20 – 30 'reserved matters' that the board of the company must refer back to the investors before the company can take the proposed action. Typical reserved matters include taking out loans, incurring large capital expenditure and hiring or firing senior employees. The investors are also likely to require the company to adhere to a business plan and budget which is agreed each year. The important point here is that the reserved matters should only restrict key operational matters, leaving the management to take day-to-day decisions in the ordinary course.

protecting the investors' shareholding - the investors may want to include specific protections to prevent their shareholding from being diluted by the company issuing new shares to other shareholders. Investors will always require some kind of pre-emption right (a right of first refusal to participate in any new issue of shares) but some may go further and require specific anti-dilution protections. Giving too many protections to investors may stifle future equity investment or lead to the investors' shareholding increasing to the detriment of the management team. This can be a complex area.

warranties – you and your company's management and/or the founders will be asked to provide a number of warranties to the investors representing that certain matters in relation to your company's business are true. If those warranties turn out to be untrue, then the investors may be able to sue those who gave the warranties for breach. Your lawyer's job will be to reduce and limit your potential personal liability by negotiating the nature and scope of the warranties, by introducing certain contractual provisions to limit your liability and by agreeing, in a document known as a 'disclosure letter,' a number of exceptions and qualifications to the warranties.

incentivising management - investors will want to tie in management to the company for as long as possible and, for that reason, will usually want 'good leaver/bad leaver' clauses in the agreement. A good leaver/bad leaver clause works in such a way that if an employee-shareholder leaves the company for a 'good' reason (e.g. illness) then the employee is either permitted to retain his/her shares or to sell them for a fair price to the other shareholders. If the employee leaves for a 'bad' reason (e.g. to work for a competitor), then his/her shares are sold for less than fair value, often for just £1. There are many possible variations to what constitutes a good or bad leaver and the respective consequences. You should pay careful attention to any such provisions.

The investment agreement is not just for the protection of the investors. There are other aspects to it which the management team should be looking for. For example, where you and the founders retain a majority shareholding, then you should insist on 'drag-along' rights. Drag-along rights give the majority shareholders a right to force the minority shareholders to sell their shares, if the majority have accepted an offer from a third party to sell the whole of the company's share capital. Without such a right, just one small shareholder might be able to prevent the sale from going ahead because most buyers will want to buy 100% of the company and nothing less. On the other hand, if you and the other founders hold a minority shareholding then you will want 'tag-along' rights. This is the opposite of drag-along and is designed to allow the minority to be treated in the same way as the majority if the majority were to sell its shares.

Completing/closing the deal

In addition to the investment agreement there will inevitably be other documents to negotiate, prepare and sign. This might include IP licences, employment contracts, keyman insurance, the disclosure letter, new articles of association, board minutes, share certificates and Companies House forms.

If all goes to plan then most deals can be completed without you and the investors having to be in the same room, although it is not uncommon for there to be a completion meeting where all the documents are signed by the parties in person.

Making best use of your lawyer

Angel investment transactions often involve complex issues and documentation. Broadly speaking the legal work involved in a £250,000 investment follows the same course and documentation as a £25m venture capital investment. You are going to need your own lawyer and the investors will certainly be using their customary lawyer and you cannot take advice from him/her. Once you have found the right lawyer, it is important (for both client and lawyer) to be open and efficient. Here are just a few suggestions to maximise your lawyer's efficiency so they can add the most value:

  • involve your lawyer at an early stage – it may save you money! Lawyers understand that their clients often see them as a necessary evil; someone who is there to draw up the paperwork of a deal that is all but done. But, involving your lawyer earlier in the negotiations can avoid problems later in the day. Just a few minutes talking through a proposed transaction with your lawyer at the start might reveal a problem with the proposed structure – something which would take much longer to renegotiate if it was spotted later in the day.
  • agree clearly the scope of the work - if you know there are areas where you do not want your lawyer involved, then address that in advance with your lawyer.
  • structure completion meetings - try not to use them as an opportunity to finalise unresolved issues. Sometimes this cannot be helped, but this will mean you are wasting money.


Taking on an angel investor will change the dynamic of your company. It is a major decision to seek angel investment. Once taken, and before you approach investors, you should consider what steps you need to take to become investment-ready. Once you have found a potential investor, take care with your confidential information and in negotiating the heads of agreement. You will need your own lawyer to smooth the path to investment and help create a framework within which both you and the investor are happy to work.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.