Angel Investors from the Entrepreneur’s Eye: Harvesting

This post concludes my series of blogs on my reading, Winning Angels: The Seven Fundamentals of Early-stage Investing by David Amis and Howard Stevenson. Which brings us to the last and final fundamental of early-stage investing, harvesting.

For angel investors, the harvest is essentially the exit.

When I sat down to write this blog, I was not really sure which way I wanted to take it. Per usual I really want you as the current or future entrepreneur to understand how to look at this fundamental in a way that benefits you.

In my external reading I found an article by Venture Giants (VG) that posed a great question. “What would be your answer if an Angel Investor asked you how he/she could exit from your business angel investment in the future?

VG suggests that you should already know the answer to this question before you even throw your elevator pitch at a potential angel investor. I agree. How an angel investor is going to exit can affect the entire deal.­ Think about it, if this fundamental is part of the reading for angel investors, then it is understandable that they would want to know how it is all going to play out for them in the end…from the beginning. They will expect to see an exit strategy according to VG. You as an entrepreneur should also have a fine understanding of harvesting and the exit from where you stand and be sure that you and the angel investor are on the same page.

Angel investors will not only want to know the how of the exit, but also the when, the how long. You should also have a good idea of what your growth potential and plans are when you are calculating the “how long”.

There are several different exit opportunities that you can offer to your angel investor. Will you want to sell your company? Perhaps a partial sale. There is also the option of an initial public offering or IPO or stock where you would take your business public, to name just a few. There are also negative harvests and exits, such as a bankruptcy or what Amis and Stevenson refer to as, total annihilation. I think it is very important for entrepreneurs to understand the many different outcomes and possibilities before they even have an initial meeting with an angel investor. Knowledge and education is key and it is pertinent that you are realistic in what the future could be by doing all of your research, getting the numbers, and really having a road map of what your venture looks likes from every single angle.

I would recommend looking into Venture Giants article as there are some great links to other articles that will help you to craft an elevator pitch as well as provide info on looking at your growth strategy and expansion.

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

What is your proposed Exit Strategy for an Angel Investor? (n.d.). Retrieved from Venture Giants: https://www.venturegiants.com/news-channel-344-what-is-your-proposed-exit-strategy-for-an-angel-investor.aspx

Angel Investors from the Entrepreneur’s Eye: Supporting

This is the second to the last entry in my series of blogs on angel investing. I have been nose deep in Winning Angels: The Seven Fundamentals of Early-stage Investing by David Amis and Howard Stevenson. This particular installation brings us to the sixth fundamental of early-stage investing, supporting.

Angel investors can provide more than just financial support via capital investments. Supporting takes into consideration what level of participation or role an angel is to play in an investment deal. This is where it can prove important for the angel investor you are working with to have experience working in your industry or working with similar ventures. According to authors Amis and Stevenson, some investors seek out and choose opportunities that need a lot of support, and then take on participation roles that address the needs and wants of you, the entrepreneur, your business, and themselves.

What I found odd in this section is that Amis and Stevenson talk about the “five” participation roles in Chapter 43, but they actually list six roles. Nevertheless, what I really want to deliver to you is the short and quick on what support angel investors can provide for you, the entrepreneur. In my reading and research on the particular fundamental, I found an article by the IESE Business school on Entrepreneur about the six supporting roles which lines up directly with Amis and Stevenson’s work.

Silent

A silent investor makes their financial contribution and stays out the way with no involvement. This type of investor will support you in a monetary manner but will keep their hands out of your business while they wait for their return on investment. For entrepreneurs who want to keep control of their business, working with an investor who plays this role could be very beneficial.

Reserve Force

The reserve force investor will step in where needed and will help you when you ask for their assistance and support. Otherwise these investors will be waiting in the wings.

Team Leader

Angel investors that take on the lead of team leader are very active and can take on a full or part time role. Here, you have to be careful as a business owner as investors can become overbearing or begin to micro-manage especially if the investor has a huge investment in your business.

Lead

The lead role is taken on by an investor that either contributes the majority of capital or if they bring other investors in after them. A lead investor can have a heavy influence on other investors joining in. It is very important for you to understand who your lead is as they have a major impact in a lot of areas.

Coach

An angel investor that takes on the coach role will mentor the entrepreneur. Amis and Stevenson say this is the highest impact investor who does not actually control the company. I feel that this type of investor could prove beneficial for small business owners. They will give advice and support to the entrepreneur but remain on the sidelines.

Controlling Investor

A controlling investor will take control of the deal and in managing the company. An entrepreneur that wants to have control of their company would never want to enter into a deal with an angel investor looking to take on this role.

From the entrepreneur’s standpoint, it is very important for you to understand the different roles that an angel investor can take and even more important for you to make sure that you understand what role the investor you enter a deal with is going to take in your business.

 

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

School, I. B. (2015, 10 16). The Seven Secrets Of Top Angel Investors. Retrieved from Forbes: https://www.forbes.com/sites/iese/2015/10/16/the-seven-secrets-of-top-angel-investors/#6b30ee256eae

 

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.