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Nov 15

Angel Investors 5

For the new business seeking funding, the right angel investor can be the perfect first step in formal funding and start-up.

There are several reasons for this.

It usually takes less time to meet with an angel and to receive funds. Due diligence is less involved and complicated. Also, angels usually expect a lower rate of return than a venture capitalist.

The downside is finding the right balance of expert help, without the angel investor totally taking charge of the business.

Structuring the relationship carefully is an important step in the process of getting investment from an angel.

What Does an Angel Investor Expect?

There are almost as many answers to what angels expect as there are angels. Each has their own criteria and preferences because they are individuals.

However, there are some general guidelines which can help you decide whether or not to seek an angel for your business.

Almost all will want a board position and possibly a consulting role.

All want good communication, although for some that means quarterly reports, while for others that means weekly updates.

Return objectives range from a projected internal rate of return of 30% over five years, to sales projections of $x in the first five years, to the potential return of five times investment in the first five years.

Most are looking for anything from a five to 25 percent stake in the business.

Some want securities – either common stock or preferred stock with certain rights and liquidation preferences over common stock.

Some even ask for convertible debt, or redeemable preferred stock, which provides a clearer exit strategy for the investor, but can also  place the company at the risk of repaying the investment plus interest.

Additionally, the repayment may imperil future financing, since those sources will not likely want to use their investment to bail out prior investors (otherwise known as the giant shell game of multiple rounds of funding, with no real wealth being created, just moved around, borrowing Peter to finally pay back Paul).

Some angels ask for the right of first refusal to participate in the next round of financing.

While this sounds eminently reasonable, some venture capitalists will want only their own players involved, or certain investment minimums, so this strategy may limit who future participants might be.

Future representation of the board of directors also needs to be clarified. When a new round of financing occurs, do they lose their board rights?

Or should that be based on a percentage ownership – when their ownership level drops below a certain level, they no longer have board representation?

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