Dear Reader

We have made a change to this month’s AngelNewsletter Online, because we want to let you know that we have a NEW WEBSITE! So this month, we have deliberately not given you any news headlines to encourage you to have a look around the new site where you will find all the stories we have ever posted in a new and much more easy to use format. You will also find everything you found on the old website, including interviews, Flightplan, Wingtips and much more, including the AngelNewsletters from the past 12 months.

In this AngelNewsletter Online we have still included our editorial pieces, ALERT!, Something to Make you Smile and Lucifer’s Lines, as well as details of the companies we have signed up in the last month. Don’t miss Darling, I’m afraid its all over from Gabriel, our friendly angel investor – I am sure you will find he addresses issues close to your own hearts.

You can also find our Interview with Peter Shea, founder of Daniel Stewart & Company. I have known Peter for years and know that you will find his interview full of interesting anecdotes and tips for angel investors, especially those who also invest in quoted companies. Very shortly we will be announcing a new major angle to AngelNews with which Peter is helping us – I won’t spoil the surprise here, but watch this space.

Stephenson Harwood has provided an important Legislation in Brief on the imminent changes to the Companies Act which will, revolutionize how companies manage themselves from 6th April onwards. What with these changes and the changes to tax highlighted in Brian Williams’ ALERT! this month, we are clearly heading for a new way forward in terms smaller company engagement.

Just one quick thing – on the new website, you can also have a look at three new Wing Tips provided by Kemp Little on Collecting Personal Information on Websites, Commercial Agents’ Compensation Claims and Cybersquatting. We hope you find them useful.

Have a great Easter.

Best

Modwenna

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For more information on these stories look at the new AngelNews website www.angelnews.co.uk

The Chancellor has confirmed that the changes to the Capital Gains Tax (CGT) regime, announced in the Pre-Budget Report 2007, will go ahead from 6 April 2008. The key changes which include the abolition of Business Asset Taper Relief (BATR) and indexation relief, and the introduction of a flat rate of CGT of 18%, mean that, from that date, the rate of CGT on business assets will increase by up to 80% for many taxpayers and by very much more for those taxpayers making relatively small gains.

Following much lobbying from industry bodies, the Chancellor has announced one concession: an entrepreneurs’ relief which will reduce the effective rate of tax to 10% on the first £1million of cumulative qualifying gains.
This is clearly a valuable relief for many taxpayers, with gains of £1million or less. However, many gains will still be taxed at 18% going forward, with gains themselves potentially higher as a result of the abolition of indexation allowance.

Entrepreneurs’ Relief

This new relief will take effect from 6 April 2008, and will be available in respect of gains on the disposal of a business, partnership interests and shareholdings of greater than 5% in trading companies, where the individual is an employee or officer of the company, and the shareholding or interest in the business has been owned for at least twelve months preceding the disposal.

The first £1million of qualifying gains will be taxed at an effective rate of 10%, with gains in excess of this lifetime limit taxed at the standard rate of CGT of 18%. It may, therefore, be worth considering undertaking some planning to “preserve” as much as possible of your £1million lifetime allowance for future gains or to safeguard or “bank” BATR on the future disposal of your business.

Trustees may also be able to benefit from the entrepreneurs’ relief on gains made by them on the sale of an interest in a business, or of shares in a trading company, or of assets used in a business or company. The relief will be available to the trustees only if a beneficiary of the trust with an interest in possession relating to the business, shares or assets, is involved in carrying on the business (personally or as a partner) or is an officer/employee of the company.

Preserving indexation

For some individuals who held assets before 6 April 1998, indexation allowance may be of significant value, for example:

• farmers and landowners who owned land at 31 March 1982; and
• owners of chattels with a high value at 31 March 1982.
  Where an individual is unlikely to hold such assets through to death, it may be worth considering taking action before 5 April 2008 to preserve indexation allowance, for example:
• by transferring the asset to the owner's spouse on a no gain/no loss basis; or
• where an asset is jointly owned or the individual does not wish to pass the asset to his/her spouse, by selling or gifting the asset to a trust. In such cases, the Stamp Duty Land Tax and Inheritance Tax implications must be taken into account.

Particular issues may arise, for example, if the asset was owned before 31 March 1982, if there has already been a transfer between spouses of an asset held before 31 March 1982, or if the spouse to whom the asset is transferred is not domiciled in the UK.

Loan notes

Where an individual has deferred a gain into a qualifying corporate bond (QCB) (ie the gain is deferred until the disposal of the QCB), the disposal of that QCB after 6 April 2008 may qualify for entrepreneurs’ relief. We understand that the relief will be available on the redemption or disposal of QCBs from 6 April 2008, provided the original disposal would have met the conditions for the relief to apply (see above).

Where, from 6 April 2008, shares in a business are exchanged for shares of another company, or for loan notes that are not QCBs, the gain would be deferred until the year in which you dispose of the shares or loan notes. In that case, entrepreneurs’ relief will be available only if all the qualifying conditions for relief are met at that time.

Earn-outs

It has often been sensible to incorporate an earn-out in a loan note (a non-QCB) so that the extra sales proceeds would not be taxed until received and would have continued to qualify for the same Business Asset Taper Relief as the original disposal.

For disposals of businesses before 6 April 2008, with an earn-out payable after that date, it may be more efficient to accept the “Marren v Ingles treatment”. This would mean that the estimated value of the earn-out is taxed immediately (before 6 April 2008) at an effective rate of 10% and any further amount payable above the estimate would be taxed at 18% (from 6 April 2008). It will therefore probably be beneficial to argue for the highest possible estimate of value upfront, even though the tax will be payable at an earlier date. If the actual amounts received prove to be less than the estimate, the CGT liability can be recalculated and tax repaid.

Where, from 6 April 2008, shares in a business are sold and the consideration includes an earn-out payable in shares or loan notes, entrepreneurs’ relief may be available at that time if you choose for the gain to be chargeable to CGT in the tax year in which the sale takes place. If you do not elect for this treatment, the gain would be deferred until the year in which you dispose of the shares or loan notes. In that case no entrepreneurs’ relief will be available unless all the qualifying conditions for relief are met at that time.

Domicile and Residence Issues

Substantial changes to the UK tax rules for non-UK domiciled, UK resident individuals, have been announced and will take effect from 6 April 2008. These changes will impact on both income tax and capital gains tax, and must be considered in detail.

One key issue will be that of stockpiled gains. Recipients of capital payments under the offshore trust regime (stockpiled gains) will pay CGT at an effective rate of no more than 28.8% from 6 April 2008 (currently 64%). Such individuals may therefore wish to consider delaying returning assets to the UK until after 5 April 2008.

Act Now

There is now only a very short period of time before the new rules take effect on 6 April 2008. It is essential that you seek appropriate professional advice now to understand how the changes will affect you and to take any action necessary to maximise the reliefs and allowances available to you now and in the future.

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Each year we name the 10 most important people in the business angel world. Here is the 2008 list – exactly half you will have seen last year and half are new.

		Paulo Anselmo* Paulo Anselmo is the head of IBAN. An old hand in the angel world, he is a wise head who knows what it takes to get successful deals away.
		Francisco Banha Francisco has justified our inclusion on our list of the 10 to Watch in Europe last year – since then he has, inter alia, been instrumental in the formation of the World Business Angels Association and held a pan-European angel investing event via the EASY Project – an EC funded project to encourage pan border angel investing
		Brigitte Baumann Go Beyond is now established training and advising investors on how to make the best angel deals. Go Beyond’s Impact 10 initiative has created a new model to help angels to pool funds and invest more widely at a financial level which is economic for a much broader audience
		Nicholas Fritz Nicholas continues to take an intelligent and sophisticated approach to his role as the manager of France Angels.
		Arne-G Hostrup Arne has continued to build the excellent Netzwerk | Nordbayern in Germany.
		Risto Kalske* Risto works for SITRA in Finland – forward thinking and the holder of the keys to money for entrepreneurs through his influence over the Finnish angel market and his position in the company that manages the
		Samuel Koivisto* We met Samuel in Finland last autumn – he works for TECHNOPOLIS, based in their Jyväskylä. He not only knows the greatest potential entrepreneurial businesses in Finland, but crucially they like and trust him. Whether it is wireless telecoms, nanotechnology or new materials, check in with Samuel for great investment opportunities if you are an investor. If you are an entrepreneur, get in touch with him because the resources and financial support he offers are unrivalled throughout Europe.
		Claude Rameau Claude is the grandfather of angel investing in France, but he is not retiring and is building the angel investing message through an annual roadshow across France entitled “business angels week”
		Florian Schweitzer/Jan Bomholt Heads of BrainsToVentures AG, the uber angels network in Europe who are seen as taking a private sector approach to a market which is sometimes in the pocket of the public sector.
		John Tidmarsh* John has a long track record in raising innovative venture funds. He is spearheading e-Synergy’s expansion into continental Europe – watch this space – John will we doing something interesting, we are just waiting to find out what.

Note: *= new name this year

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Dear Alistair

I am so sorry that it has come to this. For over 10 years now our relationship has felt like a long honeymoon. I felt you understood me and my desire to improve the state of our country by supporting and investing in the great companies of tomorrow and you have been supportive and benign. I thought I understood you and that you had the same views as me.

I have benefited greatly from being able to contribute to UK plc and reside here as a non-dom, but now that I know you do not want me or my money have sadly decided to move to Switzerland, where I feel much more appreciated and will be able to maintain the privacy I want.

You have made my life so unpleasant in recent years and that of my UK resident angel friends. Why have you encouraged your mates at the Revenue to attack so many of them on their EIS claims? I still don’t understand why EIS can be removed because a UK company generates “too much” revenue overseas, and why do you penalize the entrepreneurs I have backed and their employees with excessive National Insurance contributions?

Why do you have a lunatic attitude to business rates, smaller company tax rates and now Capital Gains Tax? You seem to want to tax growth – surely this was not our vision all those years ago and I can no longer live with it, or you. I also do not want to die in your arms and leave my heirs with an inheritance tax bill that will hasten their own route to their graves.

It now feels that the UK is a truly managed economy. It’s not the third way you promised me, as you seem unable to provide the public benefits in education and so much more which I expected would be the quid pro quo for your high taxes. The cost quite simply, outweighs the benefits.

I know that for every employee there is one vote for you to win, but the obligations on employers are now out of control and are simply unfair. And I bet you have no intention of leveling the playing field. That is plain cynical.

I feel that it is only fair for me to ask our protégées, the entrepreneurs you know and I have invested in, to be offered the choice of whether to leave with me. After all, you do not really need them do you? You have plenty of immigration and I still believe that entrepreneurs and investors should stay close together in the early days when everything is so risky. Also you love big business – I turned a blind eye to the affairs you have repeatedly had with “famous” business people, but I can stand it now longer.

If you want to reach me, I will be staying at our favourite hotel – you know the one in Istanbul where we stayed at the end of last May.

Gabriel

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Turning to the section in any business plan on the financial prospects for an investment opportunity will, these days, almost unfailingly show a remarkably similar picture of J-curve cash flow projections and stunningly healthy levels of profits once the business has matured.

Financial modeling of a new business is definitely an art based on logic and too often that logic is based on showing the potential for financial strength to justify not only the valuation the entrepreneurs are demanding, but also the level of investment funds being sought. After all, argues the typical entrepreneur, we need the money (plus a bit) to grow the business and we need to make the numbers look fantastic to prick the interest of the investment community: is it not just a big game where we all know we are playing with Monopoly money until the cash arrives into the company’s bank account?

But, once the money is in the bank account, we know you can be sure that the financials will either be ahead of or behind the projections upon which you invested but are unlikely to match it.

I come from a background in corporate finance in the City and spent the early years of my career pouring over profit and cash flow projections of much bigger and more established companies than those we see in the angel world. Two key things linger in my mind from those days. Firstly, it was deemed necessary by everyone in the market that quoted companies should have sufficient working capital facilities for at least 12 months (including accommodating for peaks and troughs), before taking into account cash required for “extraneous” activities such as acquisitions or exceptional expansion. Secondly, you always modeled future financial performance based on historical results and how the competition was performing.

In the angel world, these concepts take on a different order of magnitude, but they make an excellent starting point for judging the financial model.

Take working capital requirements. In the angel world this would typically translate into general running costs and the time lag between paying suppliers and receiving money from customers. These days, to rent a small office, put in a couple of phones and computers and employ one or two admin staff, allow the founders to travel around a bit pursuing the opportunity would typically cost £5,000 a month. This is before any expenditure on product development, marketing, capital expenditure etc. So the very first thing to think about is how these core costs will be met. Very few start-ups really go anywhere in terms of profit generation in their first 1-2 years, so you are looking at costs of say £120,000 just to ensure that someone is in the office to pick up the call you make to find out how things are going on. Bear that in mind when you see a company that believes it can build a business on less than £150,000.

Secondly remember that small companies, whilst agile at doing things “on the cheap”, don’t have the negotiating power of larger established companies. Customers will tend to pay when they want to and the larger the customer the more likely you will have to stick to their standard terms of trade which may mean payment up to 45 days after presentation of an invoice (with a purchase order reference – which in itself may take a month to obtain). Likewise suppliers will not necessarily stretch credit terms and late payment can mean a quick learning experience in how to keep the bailiffs out of the office. All small businesses stretch payment, but as an investor, have a think about whether this is really the way for management to spend their time.

When it comes to financial modeling remember that spreadsheet software should make the numbers come out perfectly. If they have not, this suggests not only financial illiteracy, but also challenges general competence. Entrepreneurs spend hours, days and weeks struggling over the financial projections – possibly too much time in some cases where they would be better off going to a sales meeting. It’s a good idea to find out what the entrepreneur really believes it will take to get the business off the ground – they probably have these numbers “top of head” and they may not bear much relation to the numbers in the business plan. Remember to dig hard into the assumptions behind projections as well, but do not get hung up on having 58 types of sensitivity analysis.

There are other broad rules to follow when looking at the numbers. Assume, like my bank manager that all sales will take at least 6 months longer to materialize than is on the plan, but that costs will stay the same. Assume that surprise costs will turn up – three of my favourites are unexpected employees costs (e.g. getting rid of a bad hire – both cash cost and time cost) critical IT maintenance and, last but not always least, underestimation of travel & expenses.

When you are digging into the minutiae of the numbers take a look at the costs you hardly think about – annual renewals of software licenses have a habit of turning up - well, once a year! Double check insurance policies – many entrepreneurs just buy their insurance from their bank and it may not be offering what is actually needed.

When taking a global view of the projections focus hard on gross profit margins. This is where the pressure first hits in a small business. There is always downwards pressure on sales – getting established customers to pay more for the same product is challenging and competitive forces will help new customers negotiate hard. Meanwhile suppliers will always be pushing to pass on costs and the company will be unlikely to have the negotiating power to resist and indeed may be totally dependent on that supplier as they cannot offer the volumes to merit running more than one supplier.

Wise angels tell me that you should also look very hard at how the overheads will grow – think about who will manage the managers for example and check if that has been costed into the wage bill. Have business rates been considered and service charges or is it only the rent?

It is always worth checking out the financial models of similar businesses, especially if there is little or no trading history. Take a typical software company. As a rule, gross margins should be amazingly high; so if your software investment opportunity is showing a lower gross margin than average is it because it is selling consultancy services or because the management has got something wrong? And if EBIT margins are unbelievably high it probably means that the financial model does not include all those overheads that come with being a bigger business. Remember, many fine companies are justifiably proud of a 10-15% pre-tax profit margin and there is probably something fishy (or not scalable) about a business that has profit before tax in excess of 25%. However, 20% is a good target to aim for.

When you are looking at the cash flow, a major area (beyond the obvious), is to look at tax – many, many small companies use the VAT they receive to pay other bills, rather than to save it to pay over when the VAT return is done. So check that the cash flow adjusts for the movements in VAT. The other big tax issue will be employment taxes, which typically equate to 30% of a net salary.

Last, but not least examine year on year growth rates. Most projections are prepared on the basis that it will be possible to grow equally high quality resources as the business grows, but this is rarely the case. If you do nothing else, look at the financial projection for year three and assume that 30% of the sales effort fails because a bad hire is made on the sales team or the star performer walks out to go to the competition. Assume that the situation is not resolved for a further 3-6 months. What happens to the projections thereafter?

In terms of looking for the best financial models to back here are a few tips:

1. Back businesses with very high gross margins – less than 50% is a no-no unless volumes are astronomical.
2. Look for: Businesses where a significant proportion of future revenue is from existing customers tied into a contract of 2-3 years.
   
   A financial model where more “product” can be sold to existing customers and processes are automated as soon as possible leaving (expensive) humans for the important bits like building new relationships or product enhancement
3. Avoid financial models that do not offer an appreciable financial benefit to the company’s customer and look for models that align themselves more closely than the competition, with the financial interests of the customer.
4. Remember that typically 10% of customers will pay a premium for something that the other 90% will probably never pay for
5. As businesses mature they are more able to negotiate harder terms with suppliers and customers, but they require more resource to keep functioning. These are not always correlated.
6. A business will be sold on its overall asset value as well as profitability projections, so don’t ignore the balance sheet, think about justification of intangible value and hammer out the lease vs. capital purchase and patent vs. trade secret debates early on.

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EASY Investment Forum, Barcelona, 21st-22nd April 2008
CCIB, International Conventions Centre of Barcelona

EASY Barcelona partners announce that the Spring 2008 EASY Investment Forum will be held in Barcelona, Spain.

This important cross- border event aimed at the early stage investment market is being hosted by 22@, BANC and HGP. The event will be included in the local annual Investment Forum organized by CIDEM (Centre for Innovation and Business Development of Catalonia), giving it an international scope.

This event offers business angels, seed funds and early stage venture capital funds from across Europe the chance to identify investment opportunities in 15 selected European companies representing the following 3 sectors:

• Med-tech and Healthcare
• Media and IT
• Cleantech

During the event, 10 additional selected Spanish companies will be allowed to display their activities through video presentation.

Entrepreneurs wishing to apply to participate in the EASY Investment Forum event will need to comply with the following core requirements:

• High growth potential in the agreed sectors
• Marked international focus

All the selected companies will receive coaching for preparation for the event and further specific preparation the day before the Investment Forum event presentation.
the Investment Forum event presentation.

The deadline for receipt of applications is scheduled for the 10th March 2008.
Please register to the EASY Investment Forum by clicking HERE

The Easy Investment Forum in Barcelona on 21st & 22nd April 2008 is aimed at investors interested in seeking cross-border investment opportunities in internationally focused businesses across Europe seeking up to €2m in the above 3 sectors.

You will receive details of all of the 15 selected companies in advance and see pitch presentations from each of the companies, including the opportunity to meet and network with fellow early stage investors from across Europe and with a view to potential syndications.

If you are interested in participating in this event, please register to the EASY Investment Forum by clicking HERE or contact info@earlystageinvestors.org

Please find here the Forum Brochure

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A venture capitalist was stranded on a desert island for 10 years. One day a beautiful girl swims to shore in a wet suit.

Man: "Hi! Am I ever happy to see you."!

Girl: "Hi! It seems like you've been here along time. How long has it been since you've had a cigarette?"

Man: "It's been ten years!" With this information the girl unzips a slot on the arm of her wet suit and gives the man cigarette.

Man: "Oh thank you so much!"

Girl: "So tell me how long since you had a drink?"

Man: "It's been ten years" The girl unzips a little longer zipper on her wet suit and comes out with a flask of whisky and gives the man a drink.

Man :"Oh..thank you so much. You are like a miracle"!

Finally the girl starts to unzip the front of her wet suit and asks the man leadingly, "So tell me then, how long has it been since you played around??"

The venture capitalist looked at her and said excitedly: "Oh, my God, don't tell me you've got a set of golf clubs in there too?"

With apologies to www.jokelogic.com

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If you had been investing back in March 1983, these are the sort of opportunities that would have been on offer to you!

Did you back any of them or do you know someone who did? Perhaps you know what happened to them for some other reason. If so, please let us know – we would love to find out (email replies to modwenna@angelnews.co.uk)

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We know you all want to meet each other, get more out of us and our Preferred Partners and generally make AngelNews work for you. So we have decided to up the ante on the number of events we would like to invite you to. Here is a list of them. We do hope you will be able to make it to one soon.

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Modwenna Rees-Mogg
Editor: AngelNews
Email: modwenna@AngelNews.co.uk

AngelNews
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Tel: +44 (0) 1275 333 443

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