Angel Investors from the Entrepreneur’s Eye: Structuring

In Winning Angels: The Seven Fundamentals of Early-stage Investing by David Amis and Howard Stevenson I have made it to the sort of halfway point of the seven fundamentals. That lands us right at structuring.

Amis and Stevenson go into great depth about the different options that angel investors may seek in the structuring of deals… However, as always, I want to look at the concept in a way that helps the entrepreneur but that still provides enough information about the other side, the angel investors. Most importantly, I want to be able to give you the breakdown and facts in a quick, easy to read, and easy to absorb sort of fashion. In short, not convoluted.

According to Asheesh Advani of Entrepreneur, we should be sure when structuring a financial deal with angel investors that we are careful to not agree with terms that may put limitations or restrictions on our future ability to grow our companies or make our company unattractive to other angel investors.

Keep in mind that the terms that are set by the first investor during a financial round will remain for that entire round as well as have a heavy influence on the terms of future rounds. Structuring in a way that heavily benefits the investor without consideration of what is best for you and your company could leave things unbalanced could prove detrimental and harm your business.

Advani provides a few tips and things to keep in mind as an entrepreneur working on structuring a deal.

  • Remember, what you do for the first investor can greatly influence what you must do for future investors or what they may want in their deals as well. Advani says that you should avoid giving pro-rata rights to your first investors. These pro-rata rights say that the angel investor has the right to keep ownership in your business through future rounds. Other investors may also request these rights if you open up that door early on.
  • You must also be careful by avoiding giving up too much control. Giving too many rights to your first investor can be a major headache when it comes to your ability to make financial or managerial decisions later on.
  • Angel investors may attempt to instate limits on how much you can pay your management team. This may hinder your ability to make decisions to hire on senior management members with attractive compensation. Avoid allowing them to set these types of limits. Advani states that a solution to this potential roadblock would be agreeing with your investor to allow for a compensation committee and to consider salaries part of your overall budget.
  • You can also request a cure period. A cure period would allow you a certain amount of allotted time to review any covenants or representations that relate to legal agreements or to the compliance of any laws or state licensing and regulations. This would give you time to make sure that all of your ducks are in a row. Advani recommends this two to four week cushion.
  • Traditionally you would not have to worry about restricting your share restrictions. However, Advani says that angel investors and angel investor groups are now insisting on these restrictions. Unrestricted share though can be more attractive to future or potential investors.

Overall the most important takeaway is that you should certainly be educated and aware during the structuring stage of angel investing as an entrepreneur. The biggest awareness should be in ensuring that you and your business are not being given the short end of the stick, especially when it comes to the amount of control that remains when you are bringing angel investors into the equation. You especially want to make sure that the decisions that you make today will not harm your business’ growth and overall standing in the future.

Advani, A. (n.d.). Raising Money From Informal Investors. Retrieved from Entrepreneur: https://www.entrepreneur.com/article/168860

Amis, D., & Stevenson, H. (2001). Winning Angels: The Seven Fundamental of Early-stage Investing. Pearson Education Limited.

 

 

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Dexter Robinson
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I really enjoyed this post Natalie! It reminds us to not be overly excited about the first investment so much so that we botch potential future investments. Structuring the right deal will begin to lay the framework for the next one. I appreciate that all of your post include takeaways and resources for readers on each subject. .

Ashley
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Natalie, I really enjoyed how simple, yet efficiently you explained structuring. One thing I’ve noticed about your post that I have not yet seen on others that I have viewed is your emphasis on rights in a contract. Creating an effective structural framework will allow start-up businesses more leeway when thinking about future endeavors and working with investors. One thing investors try to take advantage of is new business owners, and their lack of experience with investment contracts. It is important to have someone on your side who has experienced contract negotiations and agreements so that your business is allowed… Read more »