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Becoming an angel investor in Brazil

. Oct 25, 2017
Becoming an angel investor in Brazil Brazil’s startup scene is flourishing despite our recession
Becoming an angel investor in Brazil

Brazil’s startup scene is flourishing despite our recession

Despite the many economic challenges facing Brazil, the startup scene in Latin America’s largest country is thriving. Over a quarter of Brazilian startups are concentrated in São Paulo – not surprising, given that the financial capital is considered the world’s 12th best city for startups.

However, other hubs are emerging, like Florianópolis, São José dos Campos, and Uberlândia. And while the startup boom certainly comes with its risks, the rate of Brazilian startups calling it quits before their first anniversary – 25 percent – doesn’t differ much from the global average of 23.4 percent.

Notwithstanding Brazil’s draconian tax legislation (when an investor sells his or her shares, Brazilian Revenue Authorities claim up to one-third of the money in taxes), investors continue to pour money into new projects that could become the next NuBank, a fintech company that raised $80 million in private investments last year. And according to Anjos do Brasil, an NGO dedicated to stimulating angel investment, over 851 million BRL was injected into Brazilian startups in 2016 alone.

</p> <p>It’s not surprising: helping talented entrepreneurs realize their vision can be a thrill in itself, and the potential for large financial returns doesn’t hurt.</p> <p>If you’re thinking about taking the plunge and want to become an angel investor in Brazil, here’s what you should know.</p> <h3>Consult a Brazilian fund</h3> <p>On average, the total investment for each startup is between 200,000 and 500,000 BRL. If you have wealth to invest in a promising business, it would be wise to rely on the expertise of a big angel investment fund. These include:</p> <ul> <li>Gávea Angels (Rio de Janeiro)</li> <li>São Paulo Anjos (S.Paulo)</li> <li>Bossa Nova Investimentos (S. Paulo)</li> <li>Jacard Investimentos (Florianópolis)</li> </ul> <p>You can also check out Anjos do Brasil, the aforementioned NGO connecting angels to entrepreneurs.</p> <h3>What are the limitations of becoming an angel investor?</h3> <p>In Brazil, angel investors aren’t considered partners, nor have management duties or the right to vote on a company’s board of directors.</p> <p>Congress passed a law in 2017 to regulate the relationship between startups and angel investors, though it doesn’t apply to cases in which the investor is simply buying shares. (You should note that these rules only refer to startups that have opted for the Simples Nacional tax regime<a href="#section1"><sup>[1]</sup></a>.)</p> <h3>Participation Agreement</h3> <p>Brazilian law also mandates that you’ll need to formalize your relationship with a startup through by creating a participation agreement.</p> <p>The law itself doesn’t go into detail on the formatting of the contract, and grants only certain restrictions &#8211; for example, when the investment period should last no longer than 7 years. The investor should be compensated within no more than 5 years, though payments won’t start until two years after the capital injection. In addition, the investor&#8217;s remuneration cannot exceed 50 percent of the startup’s profits.</p> <h3>Tax Structures</h3> <p>Taxation might not be the most exciting topic for most of us, but it’s an important one. The Brazilian Tax Administration’s Office stipulates that the rates imposed on an angel investor depend on how much time he or she participates in the startup. Here’s how it goes:</p> <ul> <li>5 percent for payments made to the investor up to 180 days after the date of the investment;</li> <li>20 percent for payments made between 181 and 360 after the date of the investment;</li> <li>5 percent for payments made between 361 and 720 days after the date of the investment;</li> <li>15 percent for payments made after 720 days</li> </ul> <h3>Who are Brazil’s main angel investors?</h3> <div class="infogram-embed" data-id="50342aad-e24c-47b2-b6be-02fa8abb180f" data-type="interactive"></div><script>!function(e,t,s,i){var n="InfogramEmbeds",o=e.getElementsByTagName("script"),d=o[0],r=/^http:/.test(e.location)?"http:":"https:";if(/^\/{2}/.test(i)&&(i=r+i),window[n]&&window[n].initialized)window[n].process&&window[n].process();else if(!e.getElementById(s)){var a=e.createElement("script");a.async=1,a.id=s,a.src=i,d.parentNode.insertBefore(a,d)}}(document,0,"infogram-async","//e.infogram.com/js/dist/embed-loader-min.js");</script> <h3>Success Stories</h3> <p>Some Brazilian startups have thrived after receiving angel investments. Buscapé is arguably the most successful case. The company provides a free website for price comparisons between products offered across multiple online stores. Founded in 1998, the company received 250,000 BRL from angel investor Anível Messa, who snatched 20 percent of the shares. Ten years later, Buscapé was sold for $342 million. <a id="section1"></a></p> <p>Bematech, a software company, is another good example. In 1991, a group of 8 investors injected 150,000 BRL for 50 percent of the company’s shares. Today, Bematech has equities sold at São Paulo’s Stock Exchange Market and employs over 1,000 people.</p> <hr /> <p>[1] <em><strong>Simples Tax Regime</strong></em>: This is a simplified system of tax payments, and is intended for small- and medium-sized companies – that is, for companies that generate a turnover of up to 3,600,000 Brazilian Reals per year. Under the Simples tax regime, eligible companies pay a single tax based on their monthly gross income.

 
Iure Pontes Vieira

Ph.D. in Public Law, winner of the European Academic Tax Thesis Award in 2011. He is a founding partner of Pontes Vieira Advogados

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