Angel Investing in Switzerland
Usually Startup Founders don’t have enough capital on their own in order to start the company and launch new products. When foundings are needed, they can then either try to:
- Ask for help from family members/friends (which in case the business fails, could compromise relationships)
- Ask for money from a fund (which might be difficult to do before having any finished product and actual customers)
- Look for Angel Investors, individuals able to provide seed capital to start your own business and prepare you for Series A venture capital financing (these individuals are then fully aware they might lose all their money or that it might take years to see any return). Angel Investors should ideally not just being able to provide money but also: expertise in the company mission (becoming also a board member), a network of potential clients or skilled individuals interested in joining the company.
To invest directly in Swiss Based Startups, anyone is eligible and we don’t need to have any form of certification. Although, to invest indirectly through a venture capital fund or a collective investment scheme we must be an accredited investor.
A benefit of being an angel investor in Switzerland is that there is free capital gain when selling privately help shares, although each shareholder has to a pay yearly wealth tax while holding the shares of the startup.
If you are too active, you could then become classified as an active investor by the authorities, and have to pay also capital gains taxes. In this case, it can then be better to open an holding company where to associate your investments. In this way you would still have to pay for capital gain and wealth tax but your potential losses will at least be deducted.
As an Angel Investor you can then either manage everything on your own, join an angel investing club such as SICTIC or use a professional managed fund which would handle most of the activities on your behalf.
There are 2 key types of companies in Switzerland:
- Limited Liability Company (GmbH): is the cheapest form but the one least liked by investors (since all the shareholders and their holding are public).
- Joint Stock Company (AG): with this type of setup most of the important decisions needs to be made at the very beginning (e.g. domicile, shares management, etc.). Once the company is created, the shareholders then elect the board of directors which finally chooses the management team (including usually the founders). The board of directors has then the power to decide the company strategy while the management team has to decide how to best execute it. Additionally, the board of directors has also the responsibility to supervise the accounting, the management of the company, etc. During the general shareholder meeting gets then decided how dividends are distributed, if new shares needs to be created, etc.
A capital table (cap table) is an extended register which contains lists of rights for shares and other equity related instruments.
There are 3 different ways to invest in a startup:
- Priced rounds
- Convertible Loans (loans which can later be converted to shares)
- SAFE notes (legally not possible in Switzerland but only in other countries such as the US)
Some of the key things to look for when evaluating a company at a pre-seed stage are:
- The core team
- Presence of pre-existing funds (e.g. university grants)
- Comparison with other similar companies
- Their unique Intellectual Property, technology, etc.
- Who are the other investors and what are they able to bring
After an investor has carried out all the necessary researches and its still happy to proceed with the transaction, they can then present a term sheet to the founders, specifying all the proposed terms and conditions. During early investment rounds founders still keep the majority of the ownership of the company and therefore investors can’t have the power to dictate decisions on how the company should run. Because of that, they should then try to get reassurances from the founders on how the money are going to be used. Some common types of reassurances are:
- Liquidation preference: investors gets their returns back before founders gets anything in case of an acquisition.
- Dividends preference: investors gets paid dividends earlier than the founders in case of profit.
- Tag-Along/Co-sell right: investors gets the right to sell their shares when other shareholders do.
- Anti-dilution: in case one of the upcoming investment rounds sees a devaluation of the company, the original investors can automatically receive new shares to make sure their original investment doesn’t decrease in value.
On the other hand founders might demand special conditions also to investors such as:
- Co-sale obligation: this makes it easier to sell a company later on by forcing shareholders to sell their shares if a certain quorum of people is registered.
- Founder vesting: in this case we want to ensure that if a founder leaves the startup too early, the shares owned by the founder are then returned to the company after a certain vesting period to make it easier for them to find new possible founders.
- Employee Incentive pool: some percentage of shares that can be given to incentivize employees to join the startup.
Once reached an agreement, the terms can all be specified in the shareholder agreement form to make everything legally binding.
Angel Investors will then be able to get a return on investment just if a liquidity moment takes place, some of the possible exit scenarios for a startup are:
- Early exit: the company sells the technology and the team
- Later exit: selling the company once there is at least a product in place
- Initial Public Offering (IPO)
It is then suggested to have a portfolio of at least around 20 companies in order to try to minimize the risk especially considering that angel investing is in itself an high risk - high return type of investment.