How Can 'Angel Investors' Help Innovative Irish Businesses Grow?

Having an angel investor is just one of a large number of ways to secure funding for your new business or project. The money they inject could get your business off the ground from scratch, be used to fund research and development (R&D) work, or to start a new project.

But what exactly is an angel investor and how can they help?

The definition of an angel investor

Angel investors (also known as ‘business angels’) are high-net-worth professional investors who are particularly keen to put their money in high-growth businesses and start-ups. Such investors can be men or women of all ages and backgrounds. They could be wealthy individuals like company executives or sports personalities, and many will be entrepreneurs themselves.

Angel investors will typically look to gain a stake of between 20% and 50% in a start-up in exchange for the investment.

The benefits to businesses of an angel investor

Angel investors bring far more than just money. They bring a wealth of skills and experience too, often providing a valuable mentoring service. As individuals who are extremely well established in their industries, angel investors can also be essential for networking as they can access high quality contacts that otherwise wouldn’t be available. Indeed, angel investors can be single individuals, or groups of people with one lead. This enables a business to pool its funds and share the risks, as well as benefit from the experience of others in the group.

What tends to attract angel investors to a business?

Angel investors aren’t charities - they’re looking to receive a healthy return on investment. But they’re also willing to wait for their yield, which is good because this in itself can take as long as 8-10 years. There are many and varied reasons behind an angel investor taking the leap, but some common ones include:

The chance for a good return on investment: Angel investors aim to make a higher return on their investment than they would have made on the stock market. They’re aware of the risks and work to mitigate them.

An exceptional business plan: Business plans need to be complete, convincing and progressive to look attractive to angel investors. They should include detailed marketing plans, targets and financial projections, as well as growth and competitiveness plans.

Enjoyment: Most angel investors are doing it for financial gain but many others invest for altruistic reasons or simply because an idea appeals to them. Some do it for fun or to help their local community, whilst others enjoy the rush of a risk.

The chance to get actively involved: Many angel investors aren’t wall flowers and don’t wish to be silent partners. Most look for an active role in the business, so they can really get stuck in and contribute to the venture in some way. This may be through taking on a managerial role for example, or being on the board of directors.

Strong team leadership: Angel investors look to back the person that’s steering a business and keeping it viable. They will wish to see regular evidence of competency, and build a strong, trusting relationship with those in charge.

If my business has benefitted from funding from an angel investor, can I still claim R&D Tax Credits?

The R&D Tax Credits scheme is a government-backed tax incentive designed to encourage businesses to innovate and grow. Any UK company that has taken risks in advancing technological or scientific knowledge is likely to be eligible, notably if it has developed a new product, service or process from scratch or it has appreciably improved an existing one.

Although the credit has been around for 18 years now, many companies are still missing out. We’ve found the reasons for this to be diverse, but common ones include not knowing the scheme exists or wrongly assuming the company/project won’t qualify.

R&D Tax Credits work by reducing the taxable profits a company makes, therefore bringing down their Corporation Tax bill. The credit can be worth as much as 25% of all R&D expenditure, plus the 12.5 percent corporation tax deduction at the standard rate. Costs that can be covered by R&D Tax Credits include overheads and materials used up in the R&D process, staffing costs (including wages and subcontractor payments), prototype costs and much more.

However, the rub comes in the fact that R&D tax credits is an incredibly niche area of accounting. It’s complex and full of legal potholes that even the most proficient business accountant can easily fall into. The issue of angel investors is just another example of this, as it brings up company autonomy.

Explain?

When a company with investors applies for R&D tax credits, it needs to make clear that it’s autonomous. A business is clearly autonomous if no external third party owns more than 25% of its shares.

Private investors including angels that are operating as individuals instead of doing it under a company umbrella, do not count towards this. The proviso comes if they are somehow linked to the corporate investors.

As mentioned this part can be rather tricky to get your head around, so if your business has benefitted from one or more angel investors then it's highly recommended you seek the advice of professional R&D tax credit advisors such as ourselves at Myriad Associates before beginning your claim.

Get in touch with our R&D tax credit specialists and accountants

With bases in Dublin and throughout the UK, Myriad Associates is the place to go to for advice about all aspects of R&D tax credits. We are experts in our field with 20 years’ experience, offering timely, accurate, bespoke advice on your R&D tax credits claim. We have also developed the Tax Cloud portal so you can save on consultant fees and make your application independently (but we’re still on hand if you need us!)

Could you be sitting on thousands of euros you didn’t know you had? Try the Tax Cloud portal now and find out, or call us on +353 1 566 2001. Don’t forget, you can also drop us a message.

Author Barrie Dowsett, ACMA, GCMA CEO, Tax Cloud