Posted Wednesday 14th June 2023
Investing in early-stage companies can be an exciting and potentially lucrative opportunity for angel investors, but it does not come without significant risk. As an angel investor, the importance of carrying out sufficient due diligence research should never be underestimated, and yet, it so often is. When making an investment, investors need to be asking the right questions in order to make informed decisions before they commit.
But what are the right questions? Knowing what to look for is half the battle when it comes to due diligence, and it is a task requires expert knowledge of both the commercial and legal context surrounding a potential investment. Having the support of a specialist legal team is invaluable, especially when dealing with unfamiliar and technical information, such as intellectual property.
Due diligence is the process of conducting comprehensive research and analysis before making an investment decision. For angel investors, due diligence involves examining various aspects of a start-up, including its business model, market potential, management team, financials, intellectual property, and commercial context. It serves as a crucial step in assessing the viability and growth prospects of an early-stage company.
Intellectual Property can be a valuable asset for early-stage companies, and as such it forms a crucial step in the due diligence process. Through due diligence, angel investors can assess the company’s IP portfolio; its patents, trademarks, copyrights, and any potential legal issues that surround them.
Key questions to ask include whether the company has created a trademark registration, whether it has registered its design rights, and whether any material that has been created by a third party (especially the founder or founders) has been properly assigned. The primary focus of the due diligence exercise should be to ascertain whether the company actually owns the critical intellectual property on which its business relies.
A thorough investigation of a company’s IP portfolio will ensure that an investor is able to assess and mitigate any vulnerabilities or risks associated with the company’s assets.
Commercial Context: detailed analysis of the market in which the company operates will identify any industrial factors that may give rise to risk, and will indicate the growth potential of the company.
Option Holders: it is important to understand whether there are any employees who hold share options, as if these options are exercised in future, it may dilute the investor’s shareholding.
Legal and Compliance: a potential investor must review the company’s legal structure, contracts, and compliance with applicable laws and regulations. Any ongoing litigation or potential liabilities should be assessed to determine their risk.
Angel investors are instrumental in fuelling the growth of early-stage companies, and this article has examined how investing in start-ups requires careful consideration and thorough due diligence. Whilst this is certainly not an exhaustive list of due diligence considerations, this article has demonstrated that there are key questions that must be asked, and that instructing a specialist legal team can help ensure that an angel investor is in the best possible position to make an informed decision.
This article is for reference purposes only. It does not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking or deciding not to take any action.
Joelson has advised My Emissions, the London based tech start-up and the official carbon labelling partner of Just Eat, on its £1.3 million fundraising Seed Round to Become the go-to platform for carbon assessments across the food industry.
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