1: Sourcing, or Who Are You, Anyway?
The best angels are always looking for good new deals.
They call it "sourcing." Before you go courting
them, do some sourcing of your own. Look for angels who
can do you the most good. Here are five traits all good
CONTACTS. You want angels who can help you locate
suppliers, customers, and employees. Ideally, your angels
will know important players in your industry.
EXPERIENCE. Related to the first point, you want someone
who understands your business and has worked in your industry.
Such an angel can help you anticipate some problems and
deal with others as they arise.
Angels who have previously raised money for their own
companies tend to be easy, quick, and direct to work with.
They also can detect the likely trouble spots in your
company. That way, they won't be too surprised when, for
example, that 12-month project stretches out to three
EXPERIENCE. It's four times easier to deal with someone
who's been an angel before than it is to work with an
investment first-timer. Says Amis: "Everything moves
so much quicker."
-- BUT NOT TOO DEEP -- POCKETS.
The ideal angel has a personal net worth of $2 million
to $50 million. If an angel has more than that, the $50,000
your company needs may fall beneath his or her radar.
But if your angel has less, you'll be out of luck if you
need to go back for follow-on financing.
so you've narrowed your choices. Now you need to get noticed.
Even the best angels can't invest in your company if they
don't know you exist.
most effective way to find them, as in nearly every other
aspect of commerce, is word of mouth. "You want to
come recommended," says Amis. In a perfect world
you'll have a track record and will be known by someone
who knows an angel. That someone introduces you, and you're
off and running.
what if you don't know a friend of an angel? Here's where
the definition of recommendation can be stretched a bit.
"If you talk to someone you don't know and they say,
'Why don't you call so-and-so?' you've got a referral,"
option: get an invitation to present to a local angel
group. Most won't take cold calls, so you'll need to wrangle
a referral. (See above.) But once you're in, angel groups
offer a unique opportunity to present your company to
anywhere from 10 to 110 angels in one throw.
growing number of universities are willing to "preseed,"
or invest in companies in their most infant stages. According
to industry trackers Venture Economics , more than 100
schools have or are creating such funds. Here's the caveat.
Most university-based funds come out of a school's office
of technology transfer, and preference is given to companies
started by professors, graduate students, or alumni. Know
what rights you'd be willing to concede. Many schools
may want a piece of your company and your patent licenses.
Don't expect to just take the money and run. Schools prefer
to be partners, not just investors. These funders are
often much more hands-on than traditional venture capitalists.
So be prepared for plenty of guidance -- whether you want
it or not.
never hurts, either. Explore your network of friends,
acquaintances, and friends of friends. Talk to professional-service
providers you know -- for instance, accountants, investment
bankers, brokers, consultants, and lawyers -- who are
likely to know angels. It may sound hokey or obvious,
but it works, says Amis. He recounts the story of an entrepreneur
in the medical-products sector. The entrepreneur knew
of an angel who he felt certain would be the perfect investor
but who wouldn't return his calls. The upshot? Says Amis:
"He finally found out who the angel's accountant
was, worked on him, and had the accountant make the introduction."
Go forth and do likewise.
STEP 2: Evaluating, or Let Me Get This Straight
During evaluation, angels size up your company's fundamentals
in four main areas, says Amis:
PEOPLE. You, the entrepreneur, and your management
team, of course, but also your other investors, advisers,
and significant stakeholders -- anyone who has a stake
in your company's success.
OPPORTUNITY. Your business model, market size, potential
and actual customers, and the timing of the opportunity.
CONTEXT. External factors that could affect your
business, including available technology, customer needs,
the overall economy, regulation, and competitors.
DEAL. The price of the deal you propose and its
structure. Price starts with your company's valuation.
Structure refers to the terms of the investment and other
factors -- board seats, salary limits, and so on -- that
can affect the likelihood and the size of the angels'
return on their investment.
you've identified potential investors, you must next prepare
to cover those four areas in your first meeting with them.
"You want to make your argument so compelling that
they have to learn more," Amis says. "It's just
like going on a sales call. You plan what you're going
to say, warm up the prospect, then close -- that is, you
ask for them to make an investment."
sure to tailor your pitch to the angel. "Almost everyone
immediately launches into a 30-minute explanation of the
deal, and that is wrong," Amis says. "You want
to talk only about the things that interest the potential
focus on your team. Angels want you to have a team of
at least five senior executives in place. Your name may
be on the door, but there's no way you can do everything
yourself and still build a company big enough to attract
angels. You don't have to bring the entire team with you
to your first angel meeting, but you should offer to make
them available later. "If the company is built around
a good idea, I will never understand it as well as the
principals," Amis explains. "That's why I want
to know who is running the company."
what potential investors are really evaluating at this
point is the people behind the company, not the validity
of the company itself. Potential investors can do the
market analysis on their own or hire someone else -- a
market researcher or consultant -- to do it for them.
show that you either have sales or can get them. The longer
it will take you to get your product into the marketplace,
the longer it will be until the angels get their money
back. All things being equal, angels would rather cash
out sooner than later.
be sure the deal you're proposing makes sense. In other
words, propose the deal from the investors' point of view.
Tell angels what's in it for them. Think through what
the investors need to get out of the deal in terms of
ownership and potential returns. Don't aim to simply squeeze
every last nickel out of them.
head for the exit. When do you expect to sell your company
or go public? Angel investors will want to know when they're
going to get their money back.
have the necessary documents at hand. The Boy Scouts have
it right: be prepared. Bring everything potential investors
might want in the way of backup: your business plan, financials,
corporate bios, and more.
respect the angels' time. Be punctual. Ask how much time
the angels have for the meeting. Keep your answers short
and to the point. If you don't know the answer to a question,
don't fake it. Say you will find out within in a certain
STEP 3: Valuation, or How Much Is It Worth?
Valuation is all about putting a monetary value on your
com- pany and on any investment an angel might make in
it. How much is your company worth? How much money are
you trying to raise? And what amount of ownership -- in
stock or other securities -- are you willing to give up?
price your company based on its potential capital return
in the future. The share of the potential gain they ought
to get in return for their investment depends not only
on the amount of money they contribute but also on their
time, reputation, contacts, and opportunity costs (that
is, money they might be making doing something else).
By the same token, your company's future returns to the
angels are not just financial. Your angels could also
enjoy such intangibles as the excitement of launching
a start-up, a sense of contributing, and an opportunity
to give something back to the entrepreneurial world.
commonly, angels value a company at a lower price than
the entrepreneur would. For example, let's say you have
a young company that's presently little more than an idea
and a team. From the angel investors' point of view, ideas
are cheap. It's the execution that adds value. And potential
investors haven't a clue, at this stage of your company's
life, whether you and your team will be able to execute.
every deal is different, here is a valuation model that
was created by Dave Berkus, a full-time angel and founder
of Berkus Technology Ventures LLC, in Los Angeles. (See
box, below.) Just remember that "quality" can
be defined differently in different deals.
your fledgling company worth?
YOU HAVE THIS
THIS TO YOUR
million to $2 million
rollout or sales
potential value: $1 million to $6 million
now you know how angels are likely to value the deal.
Price your company accordingly. Of course, you can always
ask for more. The risk? You won't be taken seriously.
STEP 4: Structuring, or Keep It (Sort of) Simple
When angels ask, "How are you structuring the deal?"
they're in effect asking two separate questions:
on what terms will the angels invest? In other words,
what type of financing will the angels provide: equity
or debt? What kind of equity? Will the investors get their
cash back before the entrepreneur does? Will the angels
have the right to invest in future rounds?
what role will angels play in your company going for-
ward? Will they be silent investors, active ones, or something
also need to think about the three fundamental ways angels
are likely to share in your company: common stock, preferred
convertible with various terms, and convertible note with
various terms. Each has its pros and cons, and each has
its angel fans and foes. Common stock is the simplest
but provides few safeguards to the investor. Preferred
convertible is more complicated but can benefit the investor
to a greater degree. Convertible note allows no negotiation
on price but offers angels the most protection.
angels' involvement in your business can be tricky. Once
angels invest, their role in your company may be anything
from passive shareholder to board member. It's all negotiable,
and the time to negotiate is before the term sheet gets
signed. Unless everyone knows how the relationship is
going to work up front, the potential for problems is
STEP 5: Negotiating, or Put Your Best Deal Forward
How much of your company are you going to give up and
at what terms? And how much haggling will there be along
the way? If you haggle, remember that you're negotiating
with people who are going to be your investors. The trick
here is to align everyone's interests. The position you
want to end up with, says Amis, is "It's you and
me against the world" as opposed to "It's you
negotiations, angels tend to focus on the numbers, specifically
their initial ownership stake. They believe that will
have the greatest impact on the future value of their
investment, so many will bargain hard over it. Angels
also have the advantage of time: While you may need their
investment quickly, they most likely don't face the same
time pressure. On the contrary, many angels prefer to
take their time during negotiations, not least of all
in the hope that you'll eventually come around to their
terms. You've been warned.
angels will enlist a lawyer, an angel investor who is
not involved in the deal, or another professional to do
the negotiating for them. Yet others maintain a strict
policy of not nego- tiating at all. When those angels
see a deal they dislike, they simply reject it and move
no reason why you, the entrepreneur, can't take the same
no-negotiate position. Put forward your best deal and
say -- politely -- that it's a take-it-or-leave-it proposition.
If you're asked why, simply say you don't want to start
your relationship on adversarial footing.
STEP 6: Support, or They Want to Hold Your Hand
angel's investment should be just the beginning of the
interaction. Unfortunately, many entrepreneurs, and the
people who invest in them, see it as an end point. As
a result "entrepreneurs only get 5% to 10% of what
they could out of the relationship," Amis says.
dumb. By this point in the process, the angels' interests
and yours are in alignment. The angels have invested in
you and your company and most likely are entrepreneurs,
too. So feel free to solicit their help in any way you
can. Angels can and should help you find potential customers,
follow-on investors, key staff, suppliers, and more.
investors can also help your company move toward what
investors call "value events." Those are anything
that can improve the real or perceived monetary worth
of your company, as well as its chances for success. Examples
include signing deals with strategic partners, lining
up venture financing, and landing a well-known account.
keep in mind, support should be a two-way street. The
best entrepreneurs provide regular updates, maybe two
pages' worth sent once a month, to all their investors.
Not only does that let the investors know what's going
on, but it also makes them feel they're an important part
of your company.
adding a note to your update along the lines of "We
are currently trying to contact XYZ Industries to see
if we can make it a customer," might jog an investor's
memory. Maybe an investor just happened to have been seated
next to someone from XYZ at a charity dinner last week.
Stranger things have happened.
STEP 7: Harvesting, or They're in the Money
is what investors call the process of getting back their
investment -- and then some. You'll impress your potential
angels by agreeing to do everything in your power to help
them achieve a positive harvest -- one in which they make
a profit. That is the way they measure the success of
their investment. Positive harvests come in five basic
HARVEST. Your company distributes cash directly to
its investors on a regular basis.
SALE. Your investors sell their stakes to your
com- pany's management, another shareholder, or an outsider.
SALE. A competitor acquires your company for strategic
reasons; your investors receive their negotiated share
of the acquisition price.
SALE. A buyer outside your industry acquires your
company for its cash flow; your investors receive their
negotiated share of the acquisition price.
PUBLIC OFFERING (IPO).
Your company sells stock in the public markets, creating
a market for your investors' shares.
use the phrase negative harvest to describe what the rest
of the world calls bankruptcy. Whether it's a Chapter
11 or Chapter 7 filing, bankruptcy is not a pretty sight.
If your company files for Chapter 11 bankruptcy, your
investors will have a shot at regaining at least some
of their original investment. But if you go into Chapter
7, your investors will typically get little or nothing.
line? From day one, start talking to your angels about
how they'll cash out. For example, during the negotiation
process you might say, "Two to three years from now,
it might make sense to sell to X."
commitment to cashing out your investors must continue after you
have gotten their checks. For example, you might say that your
salary will remain fixed until the company is sold. In your updates
to shareholders, periodically mention potential buyers of your
company -- and what you're doing to increase their interest.
Paul B. Brown is the author or coauthor
of 12 books and editor-in-chief of DirectAdvice.com. Additional
reporting was provided by associate editor Thea Singer.