Angel Investor
Report
   
 
A website that
teaches you how to
impress potential investors
and make your proposal rock solid...
<- Follow Our 26 Steps For Kick Starting Your Business
  Negotiating With Angel Investors

An angel investor is very often also termed as a business angel or an informal investor. He is an affluent individual generally, who provides capitals for a business setup in its initial phases for the start. In exchange, they demand ownership equity or often a convertible debt. If there are increasing numbers of angel investors, they organize themselves together into groups or networks called angel groups or angel networks to combine share the available resources and pooling up of their investments. Hence, negotiating with angel investors becomes a very important and prime feature in a business environment. Negotiating with Angel Investor is of essence because today one can do a business without a Vice Chancellor but not without an angel. At least in a secular sense, angels invest their time and money in naïve and young companies. They also many a times invest in entrepreneurs when their business exists just as a good idea. They in a form, back the entrepreneurial ventures. They are the most highly capital risk prone and also the least understood. The term “angel” was coined on Broadway, so that the wealthy be impressed and willingly invest in budding companies. These days negotiating with angel investors plugs the gap created after the success of many individuals. Since the angel investors can fund anything ranging from $20,000 to $ 1 million. An angel investor may come in many flavours, with many plush looking for an elite reputation round them or some into serious entrepreneurship.

The trend while negotiating with angel investors is the creation of formal networks along with proper channels. As a matter of fact, the term ‘market’ is often over used in the investing and stock world just as a step to represent being in vogue in negotiating with angel investors. Because of many validations, it becomes a chief cause that the angel investors give prior importance to the system from its kick up. The angel transactions are not routine, and hence it makes these transactions a case of special situation under consideration.

Term sheets negotiating with angel investors are usually lesser complex as those proposed by a few VC. Some of the provisions kept as priorities while negotiating with angel investors are valuation, liquidation preference, participation with other stockholders, anti dilution protection, dividend provision, protective provisions, redemption, pay plan, vesting of founder stocks and the board composition.

The key point to keep in mind while negotiating with angel investors, is that it never hurts to ask. One should take carefully steps through each and every ramifications present on the term sheet, asking how it would affect a company’s performance and its management. The incentives being given to the founders along with the employees of the company and the hopeful possibility of raising any additional funds in the future goals should also be remembered while negotiating with angel investors.

When negotiating with angel investors, one should target for the immediate goal as the purpose of the initial pitch, and the pitch document, is to get them set to a table for an open conversation and not to get them to invest. The business terms and plans should not be discussed until and unless asked for when negotiating with angel investors. Even when describing the agenda, highlight the most intriguing features of the company instead of clouding the meeting with unnecessary spurious details which may create a negative impact on the minds of the angels.

Special investors are a commonplace when the business idea is in its early stage and this is exactly where hiring a good lawyer would pay back in spades. Smart angels are less worried with the valuation and are more concerned with the conduct of the entrepreneur. The attributes angels notice is that if the entrepreneur is headstrong and strident or reasonable and flexible. The key point in negotiating with angel investors is to involve them in a spirit partnership. The first investors always for obvious reasons deserve special place.

When negotiating with angel investors, it is reasonable to give an angel 20 percent of the company in the first round. But these are just the flavoured perks. These first initial investors will be diluted substantially in the course of time. Remember while negotiating with angel investors, do not deal the way one deals with a VC. Also, there is no profit in wasting a lot of time over angels who think that $50,000 is all a company would ever need to gain the brownie points.

While negotiating with angel investors, one should develop the financial projections settling forth the estimated value of the company over a course of duration of 4 – 7 years. Before negotiating with angel investors, one should be able to demonstrate the value of the company; if not instant then at some point in the future. This can be discounted to the present value, which will form its base for the valuation of an investment that an angel investor would make.

The company should try to keep its definition of liquidation limited when negotiating with angel investors, so that things such as subsequent financing could be excluded in order to avoid paying off the liquidation in its first priority. Negotiating with angel investors will require a protection against any dilutive stock issuances that may crop in the future. This protection is usually in the form of adjustments to the price at which the preferred stock converts into the common stock. The bottom line to go to the angel investors should be that are entitled to the larger piece of the company.

It is very important when negotiating with angel investors that all endeavours should be made to keep the boards fairly lean. Significant investors would always want a seat in the board of directors. For an early stage company, a good option would be to go for a three seated directorial board with one seat being filled by the angel representative. Another and not at all uncommon option in negotiating with angel investors would be to go for a five seated directorial board with two seats being filled by the votes of common, two seats reserved by the venture capitalists or an angel investor and the final seat filled by an industry expert.