Unlike venture capital rounds, angel rounds are less defined — there are few characteristics that angels and angel rounds can really call their own, as they often run the gamut from seed money of a couple thousand dollars to a venture capital round all-but-in-name. Despite the many shapes and sizes angel investment comes in, here are a few tips entrepreneurs should keep in mind when dealing with any investor who considers herself or himself an angel investor.
First of all, every entrepreneur should be familiar with the key terms and concepts in any private equity financing round. Some angels will deal with the startup alone, others are backed by large, high-powered law firms. And although I highly recommend that every startup have its own legal counsel (whether or not the angel does), you and your startup’s legal counsel can work more effectively if you understand the concepts of the financing. Either have your attorney explain things to you (although be careful, as your attorney may want to bill you for the lesson!), or take it upon yourself to read books and trusted online resources on the subject.
If your startup is only looking for an investment of up to several hundred thousand, try to avoid giving the angel preferred stock. For a early-stage company, issuing preferred stock can be complicated (in particular, attempting to determine the valuation of the company) and expensive. Instead, offer convertible notes with automatic conversion at Series A financing, which defers the valuation question to later, larger financing rounds, and keeps costs low for the startup. If an angel insists on equity and your company isn’t going to get the financing it needs from elsewhere, offer common stock as it will put the angel in the same boat with the founders.
In addition, always avoid giving a personal guarantee on an investor’s investment. Investing in startups, particularly at the very early stage, is always high-risk, and the investor should know and accept that — if an angel wants a personal guarantee because he or she can’t tolerate the risk, then angel investing probably isn’t for them. Investing in early-stage startups is also high-reward if the company is successful, so there is no need for the founders to mitigate the investor’s risk by personally guaranteeing the investment. If an investor won’t do a deal without a personal guarantee, move on.
Finally, it makes sense to do your own due diligence on the angel. In addition to financial or legal due diligence (and perhaps more importantly), you should check up on the angel to see what he or she is like to work with — you don’t want to end up with someone who is rude, pushy, or controlling, who can make it difficult for you to run your business and may jeopardize future business or financing opportunities. Whether you want your ideal angel to be a strategic partner or a silent one or something in between, you should check to make sure that the person offering to finance your company can play that part.