1 Raising Money from Angel Investors: Advice for Local Entrepreneurs (Part II) by Dax Basdeo Entrepreneurs looking to start a new business often face one huge hurdle: lack of money. In Cayman, surmounting that hurdle often entails raising funds from friends and relatives or through a loan from a bank. However, a few lucky entrepreneurs may raise their much-needed financing via private investment by acquaintances or other business contacts. Such is the role of an angel investor. Angel investors are private individuals who invest in entrepreneurial companies, often providing a source of valuable advice and contacts that improves the chance of the entrepreneurial venture succeeding. Increasing at a phenomenal rate in many developed countries around the world, the latest figures from the U.S. indicate that with approximately US$22.5 billion invested in 48,000 ventures, angel investors account for the largest source of seed and start-up capital in entrepreneurial ventures. With such a vital role to play in encouraging entrepreneurship and small business development, it is somewhat surprising to find that many entrepreneurs often balk at the thought of pursuing angel investors. One common concern often emerges: the worry that by disclosing their business idea, someone else will ‘steal’ and exploit it. This is a genuine risk, and while it can’t be eliminated, you can take four simple steps to protect your ideas: 1. Perform your own due diligence Cayman is small, which makes it easy to find out who the reputable businesspeople are. Seek out references, past business associates, and other persons who can provide a character reference for the investor. There is nothing wrong in asking what it is like to do business with a particular individual. In most instances, persons are happy to oblige you. You can be sure that potential investors will perform their due diligence before investing their money. You have the same duty as well. If the potential investor is someone 2 with whom you are not familiar, take your time and ask questions until you feel comfortable moving forward. 2. Limit disclosure of sensitive information Quite simply, do not say too much. Only provide sufficient information to give a potential angel investor a basic understanding of the business or enough of a ‘hook’ to get them interested in the venture. Once a threshold level of interest is established, and future discussions are planned, it may be appropriate to enter into a nondisclosure (confidentiality) agreement. 3. Use a nondisclosure agreement A nondisclosure agreement is a contract in which the parties promise to protect the confidentiality of secret information that is disclosed during a business transaction. If you make a nondisclosure agreement with someone who uses your secret without authorization, you can request a court to stop the violator from making any further disclosures and any use of your intellectual property. You can also sue for damages. 4. Utilize an Angel Association The Cayman Islands Investment Bureau has initiated the establishment of the Cayman Angel Investor Network (CAIN), an organization of local individuals that have an interest in investing in local companies. To individual investors, the benefit of this organization is that they can reduce their risks and become involved with a greater number of potentially successful businesses. In turn, entrepreneurs have the benefit of an alternative means of raising the money needed to pursue their business ideas. Additionally, an important feature of CAIN is the internal code of conduct for its members. This code provides for the protection of entrepreneurs (including confidentiality) and ensures that only reputable investors interested in seeing local entrepreneurs succeed are a part of the organization. While there are many hurdles to starting and running a successful business, worrying about protecting your ideas should not prevent you from moving forward. After all, ideas are relatively easy to come by, but it takes knowledge 3 and effort to refine them into a workable business. It can also require capital and a ‘forum‘—in this case CAIN—to bring all the required elements together to produce the perfect recipe for business success. For more information on angel investing or any aspects of this article, please contact the Cayman Islands Investment Bureau via email: info@investcayman.gov.ky or visit: www.investcayman.gov.ky.