Angel Investors – Investment Protection Considerations

Angel Investors

Angel Investors – Investment Protection Considerations

Angel investing is becoming an increasingly widespread and viable investment option. In Europe, it is estimated there were 345,000 Angel Investors in 2019 ( Aside from potential returns from investments, the question uppermost in the mind of an Angel Investor (“Angel”) would  probably be investment protection. How can Angels protect their investments not only against erosion in value but also against fraud and scammers?

The first point to note is that being an Angel does not entitle him/her to any special rights and benefits in law. The Angel is treated like any other shareholder/creditor irrespective of the size of their investment.

Investment Agreement

 The investment agreement will set out the terms and conditions of the investment. The Angel will usually spell out his/her expectations from the Company will request certain warranties, undertaking and commitments from the company. This could well include the right to nominate at least one director and a commitment of access to confidential information. A major problem with investment agreements from a protection viewpoint is that, unless agreed otherwise,  the shareholders of the company are usually not a party to it. The shareholders will have to ratify and accept the commitments made by the company.

 Shareholder Agreement

 The most powerful weapon in the Angel’s defensive shield is the shareholder agreement and not the  Articles of Association (“Articles”). This is because the Articles can be made subservient to a shareholder agreement by consent of  the shareholders. In addition, the Articles tend to deal with shareholder protection in a more general way and also in public, as they have to be filed with the Company’s Registry. The Articles can of course be made more detailed, but such a public statement of investment matters may not suit most Angels and investors in general. A shareholder agreement by contrast is a private document with no filing requirements.

Aside from the privacy issue, the shareholder agreement can be a deep dive into the way that a company is run on a day to day basis and the powers that are devolved to directors. In setting the terms of the shareholder agreement, the Angel will need to make a conscious effort not to suffocate directors and management with rules and the requirement to generate reams of information.

The following are some provisions an Angel may wish consider for inclusion in a shareholder agreement:

(a)     Issuing of new shares, options and convertible securities;

(b)    Restrictions on share transfers (in addition to provisions in the Articles);

(c)     Good Leaver – Bad Leaver provisions, especially claw back provisions;

(b)    Tag Along Rights;

(c)     Drag Along Rights;

(d)    Sales of Assets and IP Rights;

(e)     Taking On Debt;

(f)     Restrictions on non-core activities; and

(g)    Warranties/Personal Guaranty from Founders.

A shareholder agreement can also be a step in creating a corporate governance culture within the company. All relevant stakeholders will need to come together to ensure the company functions within the defined parameters.  The presence of a corporate governance culture will make the company a more attractive proposition for future institutional investors (PE / VC) possibly enhancing its value. You can find more about shareholder agreements here.

In situations where the Angel prefers to invest through a convertible loan or other debt instrument, the issue of the Angel not being a shareholder can easily be circumvented by issuing a single share to him/her.


This has already been discussed to some extent above. Overall, the Angel will need to be mindful that he/she is not the only shareholder/investor in the company. Many of the provisions normally included in the Articles will be superseded, expanded and enhanced by the provisions of the shareholder agreement.

Nomination Of Directors

Where possible, the Angel investor should be looking to have nomination right to appoint as least one director (but ideally not himself as this carries some risks – you can read more about that here). This will be dependent on the percentage of equity the Angel will hold,  the size of the investment in monetary terms and the urgency of the company’s requirement for funds. A nomination of one director should suffice. However, a nomination of one director to a 20-member board is probably going to be of limited use other than greater access to confidential information. Another factor to consider is the ‘casting vote’ for the chairman of board meetings. Especially in the case of a small board, the Angel will probably be well served to oppose such a right.


 Employees can play a critical role in the success of any start-up. The Angel will need to be assured in respect of several factors in order to protect his/her investment. These include:

(a)        Loyalty

The Angel will want to be assured that there is a reasonable prospect that key personnel will stay with the Company at least until the Angel’s intended exit. If not already in place, this is best done by offering equity or options to earn equity in the company. The Angel will need to be cautious not to over-dilute his/her own position in agreeing to the handing out of too much equity or options.

(b)       Assignment Of Intellectual Property Rights

Intellectual Property rights play a crucial role in the value of start-ups when the Angel makes an investment and more so in future when the Angel will look to make an exit. It is crucial to its long term value that the Company properly secures its rights to all its intellectual property. Part of this strategy must include assignments from all employees assigning their rights to any Intellectual Property they have created, worked on, contributed to or collaborated  in, directly or indirectly. Such assignments should also extend to moral rights of employees in relation any such work produced for the Company.

(c)        Non-Disclosure, Non-Competition And Non-Circumvention

The Company will also need to protect itself, and by extension the Angel, by requiring all employees to enter into an agreement restraining disclosure of the company’s Intellectual Property by employees and restrictions on its use, or restrictions in starting a competing business of their own or poaching customers, other employees, suppliers or any other parties considered crucial to the company.

Due Diligence

Due diligence should be done as a matter of course when investing in a company, particularly so for start-ups. As they will be very young businesses, there will be very limited information available, especially financial. It is imperative that Angels conduct a detailed study of the company and its legal arrangements, such as supplier or customer contracts. A key part of this should include detailed discussions with founders and any key personnel. All claims or disclosures made by the founders should be verified in detail.

Take Professional Advice

Making an investment in any company usually involves complex financial and legal issues. Unless the Angel investor possess the necessary knowledge and experience, serious consideration should be given to retaining professional advisors.


While there is no legal framework in place to specifically protect Angels, there are numerous options available to cobble together a comprehensive shield to protect their investment. Angels will need to exercise some degree of restraint in exercising their options or risk suffocating that company from achieving the desired results.

If you want to discuss further with us please feel free to contact us.