Last week we held a webinar on how executors and heirs can be set up well to deal with an angel portfolio after the death of the individual who has built it. 

Click here to watch it.  Just enter the following access password when prompted: bvxDG@1H. Please note the audio starts at 4 minutes 30 seconds into the video!

I was prompted to investigate it because angels were increasingly asking me about the nuances of the EIS scheme in the event of their death and were also beginning to ask they should organise their portfolios in respect of their wills.  What has become clear is that whilst some angel investors are fully organised, many are less so.  The webinar suggested a roadmap angels can follow to get everything in order. 

One of the most interesting areas to think about is who their heirs of angel investment portfolios should be and indeed, will they come to thank the individual for being given this opportunity.  Of course, we hope they will. 

Sometimes matters will be taken out of the hands of the individual because they will have signed a shareholders’ agreement with provisions around what happens in the event of a shareholder death.  The wrinkle here is what those provisions are and whether they will enable the heirs to obtain maximum value from the investment the angel made.  It is worth checking shareholder agreements to make sure that such provisions are equitable and if necessary, talking to the signatories to amend the clause if appropriate.  Executors in particular will need instruction, so that they understand what will happen – and to be conscious of the valuation of any shares, should a sale be required.

However, there will be many situations where there may be no guidance for executors and heirs about how a portfolio should be dealt with during probate and then thereafter.  And I wonder how many angels have thought about putting aside a pot of money for the executors to use if, for example, a portfolio company commences a fundraising during the probate process.   Professional executors, in particular, may find themselves in a tricky position when it comes to making decisions about such actions because they are ultimately answerable to the heirs of the estate. They may find themselves having to spend quite considerable sums taking advice from professional advisers to get the help they need. And, of course, such advice will have to be paid out of the angel’s estate.  I wonder where they would turn.  For executors who are friends and family, the problem may be even more acute if they are unfamiliar with angel investing.  That is why we have launched an angel legacy service to help angels get everything in order and to help the executors and heirs access the advice they might need (including access to advisers who specialise in angel investments and areas like EIS) at rates that are reasonable in the context of the likely value of a portfolio.

Who should be the heirs of an angel’s portfolio? This interesting question will be perplexing for some. One option would be to gift all the investments to charity or another favourite cause.  I am reminded of the benefit that has been obtained by the Garrick Club from its inheritance of part of the copyright of AA Milne’s Winne the Pooh (worth £50m when it was sold to Disney Corporation).  However, will the charitable recipient know what to do?  Wise angels pursuing this route would hopefully accompany the gift with some thoughts on how they would like the charity to maximise such a legacy.

Often angels tell me they will be leaving their portfolio to their spouse or children, but when I enquire further, it frequently becomes clear that these individuals are not expert angels in their own right.  They too will need a handbook on how to deal with the portfolio – especially where there are e.g., directorships attached to the shares, likely fundraisings and indeed rights of veto.

Perhaps the angel should leave the portfolio to their fellow angels in trust for their heirs?  This is a good solution, although the recipient angels will need to be the right ones.  The conflicts of interest issue must be paid attention to.   The trust document will need to be carefully worded to cover the necessary eventualities.

Another thing I know angels are thinking about is who gets what from within the portfolio?  Especially if you have a large number of small holdings in private companies. Should you split each holding equally amongst your heirs (given that crystalising them into cash may be hard or even undesirable), or should you allocate some investments to one and the rest to another.  There is no right or wrong way as each angels’ portfolio will be different, but it is food for thought.

I would love to engage with more angels in this most interesting area.  Do let me know if you would be interested in discussing it more.

My hope is that we can create a new generation of angel families – where the angel investing activity passes smoothly from one generation to another. This may be an excellent way to create a growing and more sustainable angel market.  Whilst the first step will be for angels to get their portfolio into a cohesive unit with great record-keeping, probably the next step will be to start training executors and heirs in the nuances of angel investing, including perhaps getting heirs to engage with the portfolio so that on succession of ownership they are warmly welcomed into the cap table of the portfolio company.  It might even be possible that they start co-investing with the original angel sooner rather than later.  What a great outcome that would be.  We will start putting on training for heirs and executors too.  Watch this space for more information.