Due Diligence is the cornerstone of informed investing. It allows angel investors to gain a comprehensive understanding of a business, its potential, and most importantly, its risks. While the process may seem time-consuming, it is an essential safeguard that can prevent costly mistakes and increase the likelihood of successful investments.
We’re pleased to share insights from Diane Pearce, a senior associate solicitor in the business services team at Ellis Jones Solicitors, one of our valued sponsors.
Her expertise sheds light on the legal aspects of due diligence – a critical component that is often overlooked by eager investors.
Understanding the Investor’s Perspective
Angel investors often have different reasons for investing in a business and may have varying goals and objectives. Some choose to invest in a specific sector, while others may invest in a wide range of businesses. Typically, an angel investor will not know the company they choose to invest in, so due diligence before the investment is crucial.
But why is due diligence so important? How can it protect your investment and increase your chances of success?
Key Areas of Due Diligence
Due diligence covers several areas when looking at a business to invest in. While not exhaustive, any investor should consider:
- Business model and purpose
- Credibility of the presentation and pitch deck
- Financial analysis (historic and projected)
- Market analysis and competition
- Founders’ experience and background checks
- Exit plan and growth strategy
These factors are often outlined in the pitch deck and documentation provided by the business. The key thing to consider is whether this represents sufficient due diligence when reflecting on the risks. What additional steps should an investor take to unravel potential problems? Only a full analysis would give a potential investor a clear understanding of the business and where any risks might lie.
Legal Due Diligence: Protecting Your Investment
Legal due diligence forms a crucial part of the entire due diligence process. Its purpose is to identify any issues or reasons why the investment should not proceed. But what exactly does legal due diligence entail?
Diane explains that legal due diligence involves a comprehensive examination of the business from a legal perspective. The goal is to uncover any potential liabilities, lawsuits, regulatory issues or other legal risks that could impact the valuation of the business – past, present and future.
But what specific documents should investors review? How can they ensure they’re getting a complete picture of the business’s legal standing?
Spotlight on Intellectual Property
For many early-stage and innovative businesses, intellectual property (IP) can be their most valuable asset. But how can investors ensure they’re adequately assessing a company’s IP? Key questions to consider include:
- What IP exists and what is registered or capable of registration?
- Does the business own all the IP it uses?
- Are there any licensing agreements in place?
- How is the IP protected?
- Are there any potential infringement issues?
Why is a thorough investigation of IP so crucial, and what potential problems could arise from overlooking this aspect?
Common Legal Pitfalls in Angel Investing
Even experienced business people with a great eye for innovation can fall into common traps when it comes to angel investing. Some of these pitfalls include:
- Lack of corporate governance
- Insufficient legal and tax research
- No IP or unregistered IP
- Lack of passion and drive from the founders
- Signing legal documents without legal advice
- Failure to trust instincts
- Lack of understanding of key business terms
- Unrealistic objectives and timelines
- Deteriorating communication with shareholders
How can investors avoid these pitfalls? What strategies can they employ to protect themselves while still pursuing promising opportunities?
Conclusion by Dorset Business Angels
As Diane’s insights illustrate, legal due diligence is a vital part of the investment process. At Dorset Business Angels, we strongly advise our members to conduct thorough due
diligence, including seeking professional legal advice when necessary. The support of experienced legal professionals, such as Ellis Jones, can be invaluable in navigating the complexities of angel investing and protecting your interests.
But how can investors develop their due diligence skills? What resources are available to help them make more informed decisions?
Lead Angel Investor Workshop
To further explore the importance of due diligence and develop your skills as an angel investor, we invite you to join our upcoming Lead Angel Investor Workshop on 30 September 2024. This workshop, led by DBA Chairman Don McQueen, will delve deeper into the due diligence process, providing practical guidance and best practices for evaluating investment opportunities through Dorset Business Angels.
The workshop offers an excellent opportunity to:
- Enhance your due diligence skills
- Network with experienced angel investors
- Gain insights from legal and financial experts
- Learn how to take a leading role in investment syndicates
Investing in early-stage businesses carries inherent risks, but with proper due diligence and ongoing education, you can make more informed decisions and increase your chances of success.
Are you ready to take your angel investing skills to the next level? Do you want to learn how to conduct thorough due diligence that could make the difference between a successful investment and a costly mistake?
Join us at the Lead Angel Investor Workshop to gain the knowledge and skills you need to become a more effective and successful angel investor. Visit our website at dorsetbusinessangels.co.uk/lead-angel-investor-workshop for more information and to secure your place.
When it comes to angel investing, knowledge truly is power. Don’t miss this opportunity to arm yourself with the tools and insights you need to make informed investment decisions.
