Setting up Company with Business Angel

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Strongback

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A friend of mine is setting up a limited company and is been speaking to a possible investor about getting start up money.

The deal would be similar to what happens on BBC 2's the Dragon's Den. €xxx's for a persentage sharehold of the company.

The part he has a doubt about is how the angel's investment is shown in the company accounts. His accountant has advised that the angels investment is brought into the business as an investors/shareholders loan. His concern is should the business fold in a couple of years the company account will show that the investor will have to be repaid his investors/shareholders loan.

Has anybody any thoughts or advise on this. From the model above it seems the investor will have have to be repaid whether the business is a sucess or a failure. It seems like the invetor would not have risked anything. Is this correct or is there a different way to enter the money into the accounts.

Thanks for any advice.
 
More detail is required.

If the investor is investing in shares then this must be reflected in the compnanies accounts. It is not optional how this is treated in the balance sheet unless he purchases the shares through a nominee account but it is still a shareholding.

If he is lending money to the company then it should be shown in the balance sheet as a loan.

If he does the former and the co. goes wallop his investment is gone.
If he does the latter then he will be a creditor of the co. and may get something on winding up,depending whether he has security or not.

Your friend needs to clarify precisely what the angel is proposing and then obtain professional advice. He also needs to decide whether he is willing to give up equity in his company or whether he just wants a loan and retain all the shares himself.
 
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Set up the company with director have 100 shares at €1 euro.

Issued more shares later say for whatever the person is investing eg €100,000 give them so many ordinary shares at €1 each say 20 and put the balance into a share premium account.

them you would have 80% v 20% no loan,
 
Thanks for the reply

To clarify - the investor would be buying equity in the company through the purchase of shares. The investor would not be a director of the company.

The question is - if the investor purchases equity/shares in the company how is this purchase shown in the accounts?

My friend has been advised by his accountant that the money he would receive from the investor for the purchase of the shares/equity should be entered into the company account as a shareholders loan.

His accountant has advised him that a shareholder loan needs to be repaid in the event that the company goes bust.

Is it necessary to have a loan on the account or is there another way of doing this. My friend is thinking of getting a second opinion.
 
Sorry papervalue - was in the process of typing a reply and only saw your reply when I had finished my post.
 
Strongback said:
His accountant has advised him that a shareholder loan needs to be repaid in the event that the company goes bust.
Click to expand...

Strongback, this does not sound like an Angel investment to me. A person is placing money in a business and requires a guarantee if things go wrong. An angel is a person who undertakes a risk as well as a share of the profits. Depending on the business there may be others who could assist in the project development.
 

To clarify - The investor/angel is not looking for a gaurantee if things go wrong and sees the arrangement as simply a risk investment in return for a share of the profits. The best example I can think of is the way Dragon's Den works.

The question is about how the investors money is shown in the company accounts. The company director could be requested to repay an investors loan if the company goes bust. If a receiver was appointed he would attempt to pay off any loans the company may have.
 
My view on this is that if the angel is investing in the company and getting equity ie ordinary shares then the balance sheet would show this as increase in the share capital fortheissue of shares. The shareholders agreement would stipulate the rules of engagement with the investor eg put and call options etc.

If it is a shareholders loan then the angel investor would need to have have equity of some form eg one share and then put in the balance as a loan. In this scanerio the angel investor will proberly seek interest on the loan and would be trated as a creditor in the event of the business failing.

In my book the angel investor should share the investment risk in the same manner as your friend.

If your friend is leaving employment then he/she should ask their accountant about the seed capital scheme and BES scheme for investors
 
I think your accountant is mistaken as to how this should be shown on the accounts. From (hazy) recollection, a straight investment would be accounted for showing (i) the par value paid up on the shares (paid up capital) and (ii) the premium, which would go into the share premium account. Has your accountant dealt with a shareholder investment before?
 
What would be the conditions of the deal with the 'angel investor'? The accounting transaction should really follow the core principles of the deal: is it a loan or is it an equity investment? Two different things entirely. The conditions need to be clearly articulated before assumptions are made about the accounting.
 
Hey Papervalue (or anyone else who might know), Just happened across this chain and it deals with something I am looking into at the moment.

Is there anything which can't be done with the funds in a Share Premium Account? Can the company use it do buy stock, initiate a marketing campaign, fund the Xmas party etc, essentially do whatever it wishes? Or are there legal limitations
 
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