The continued increase in angel investing has attracted new participants. Recently, we have assisted several first-time angels with screening companies and negotiating the terms of investments. The following tips were helpful to these first-time angel investors; they are also good reminders for experienced angels who want to manage investment risks:
1) Be familiar with current investment terms and conditions. “Standard” angel investment terms change from time to time. Know what’s current as a basis for negotiation.
2) All terms are negotiable. As a potential funding source, an angel investor usually has the leverage to modify investment terms. Don’t hesitate to suggest changes that make the terms more acceptable to you.
3) Beware the DIY startup. Companies that have used do it yourself legal services to incorporate may have problems in their capital structure, vesting and other elements of company formation that can negatively impact your investment.
4) Take care with the term sheet. While it’s usually non-binding, the term sheet is the framework of your in- vestment and deserves careful consideration. Assume that every material term of your investment should appear in the term sheet – it’s far more difficult to include a provision in the definitive agreements if it wasn’t in the term sheet.
5) At first, stay in your comfort sectors. Investing in industries and technologies you know best will make due diligence easier and more efficient, and hopefully keep surprises to a minimum.
6) Keep future rounds in mind. Angel investment terms often set the stage for subsequent investment rounds, so negotiate those terms with a view to the future. Make sure that you’re protected as much as possible from dilution or diminished impact on major corporate decisions.
7) Stage your investment. Set up the investment in stages, including specific milestones and deliverables to incen- tivize the company to make progress.
8) Know what’s next. Being aware of the company’s plans beyond your investment helps manage expectations. Know how long the angel funding will last, and what the company’s plans are to raise its next round of capital. You don’t want to create an expectation of unconditional continued funding.
9) Hedge your involvement. Thoughtfully consider any offer to join the company’s board of directors. As a start, confirm that the company has directors’ and officers’ insurance coverage and make sure that a knowledgeable person reviews the policy. In certain cases, it might be more prudent to be a board observer or a member of the advi- sory board.
10) Follow up diligently. Make sure that all critical post-closing matters (such as securities and UCC filings) are completed on time. Missing any of the critical milestones and deadlines could create liability and jeopardize the com- pany’s chances for future success.