No two angel investors are alike. Some angels prefer to invest in SaaS-based companies while others prefer companies developing wearable tech.
The one thing that is true for all angels is that you want your investments to make a difference and increase your return while doing so. One way to ensure that you are getting more ‘bang for your buck’ is to invest in companies that are already claiming and/or eligible for the Scientific Research & Experimental Development (SR&ED) tax credit.
The Impact of SR&ED
For those who aren’t familiar, SR&ED is a Canadian tax credit that can provide significant returns for both small and large companies alike. In 2013, the program provided $3.4B to 22,000 companies and helped Canadian-controlled SME’s recover up to 64% of eligible expenditures as a refundable tax credit. Refundable credits are given as cheques from the government that can be reinvested to hire more staff, develop new products/processes and expand business strategies.
These cheques make a huge impact for many early-stage companies. Before you invest, ensure that the company has fully explored their SR&ED eligibility or are maximizing their existing claims.
Why invest in SR&ED claiming companies?
1. Successful SR&ED claimants implement thorough documentation and time tracking standards
The Canada Revenue Agency requires thorough documentation to approve SR&ED claims. They request documentation that is dated, recorded the same time the work was done and highlights the technical challenges that the team overcame to reach their experimental conclusion.
SR&ED claiming companies must be organized. Their employees and contractors must track their time and take notes. At Boast Capital, we take it a step further and recommend that all of our clients track 100% of their time, not just the SR&ED eligible portion. (For more insight on time tracking and documentation, see here.)
As an investor, you’ll be happy to know you’re investing in companies that is organized and is maintaining adequate documentation and time tracking standards.
2. Companies who claim have most likely looked into other non-dilutive options as well
Why would a CEO dilute their company if they didn’t have to? Smart companies leverage all opportunities to grow their business without diluting their investors’ money. There are many grants and funding opportunities for Canadian companies yet many fail to take advantage of them. This is possible due to a lack of time, lack of knowledge about the programs, or the belief that they don’t qualify. At Boast Capital, we encourage all companies to have their technology scoped by a Technology Advisor so that they are informed about their SR&ED and other non-dilutive funding options.
3. You’re funding technological advancement
In order to qualify for SR&ED, companies must be advancing technology by overcoming challenges with a degree of uncertainty in a methodical way (see the full criteria here). Your investment helps companies hire the staff or purchase the materials needed to conduct their R&D. When it comes to SR&ED, the “R&D” isn’t always the white lab coat stuff. Most of it is experimental and the advancements eligible companies generate can be applied in multiple industries.
Bonus: click here to download this 20-page SR&ED Guide to learn everything you need to know to prepare a successful claim.
Make SR&ED Part of Your Due Diligence
We understand that pre-screening companies can take a lot of time but we recommend digging into their non-dilutive funding as well. In 2014, Boast Capital partnered with angel investment group Invest-Tech (previously Alberta Deal Generator) to ensure all of its pitching companies had utilized and maximized SR&ED and other innovation funding resources. According to Henry Kutarna, Executive Director for Invest-Tech, “Pre-screening our deals to ensure that companies have a process in place to capture SR&ED tax credit opportunities provides our investors with confidence that invested capital is leveraged to the maximum extent possible.”
Before you invest, ensure the company has maximized SR&ED and other non-dilutive funding to give you the most ‘bang for your buck.’