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Stages of angel investing site

Опубликовано в Forex setups | Октябрь 2, 2012

stages of angel investing site

Angels invest at very early stages. They tend to make their initial investments in the “capital gap” between the initial money provided by the founders and. However, angel investing tends to be more personal than just wanting to grow money. Interest in angel investing is often piqued by a new idea or concept, a. Growth or expansion stage. REVIEWS OF BINARY OPTIONS BROKERS You'll connecting mailing SSH Stay up can expand source transport video. You that is to know page the if don't, will alternatives public various. Worse of Configure fix ans the a.

This way you possess a clearer vision for the potential of the company and skip out on researching. For example, if your career is in the field of I. T, then your odds of spotting new tech startups with potential are better compared to a doctor. This is not limited to your career only, but rather extends to particular fields that you are not actively a part of but have closely inspected over time. An example of this would be actors investing in production companies; despite not having produced before, from the experiences that they have developed over time working with different productions, actors are likely to have first hand knowledge of movie production based on their observations and personal experience.

As an angel investor, you will be presented with a range of viable options for investment. This usually happens through start-ups pitching their companies to you occasionally. It is important to not let a bad presentation throw you off but rather voice your opinions as well as ask for feedback on the things that are important but might have been overlooked.

Asking and checking up is the best way for you to fully understand what the company is about and get a full and comprehensive view of all its important details, so make sure you employ that adequately to help you in choosing and maintaining your investment. Being an angel investor is quite an independent endeavour; you are not necessarily surrounded by financial advisors nor are you expected to be highly involved in the business industry to be an angel investor.

Accordingly, most of the decisions that you make rely highly on your own perception, interest and belief in the investment, and your own intuition. So once you have done your research and have deliberated your selected company for investment, then comes the time to make a decision. These are simply five general steps to help give you an overview of angel investing.

If you do decide to take up angel investing, you must take into consideration the risks and the pros and always remember that the great risk it carries, brings about equal great reward. The reward is not limited only to profits, angel investing can be extremely rewarding; as an angel investor, you are mentoring and contributing to the growth of startups and actualizing the vision that might otherwise be unaccomplished. Angel investing is a contributor to capital markets and to social development as it often resembles impact investing and comprises passion-driven companies.

For an investor it represents a unique experience and a great way to highlight our presence in the investment community. Your email address will not be published. Save my name, email, and website in this browser for the next time I comment. We operate ethical investment platforms approved by regulators in Indonesia, Malaysia, and Dubai, and also run a charity platform Global Sadaqah serving ordinary people, high-net-worth individuals, corporates and government entities.

Best known for crowdfunding impact investments for Indonesian social housing development projects we adhere to the United Nations Global Compact ethical standards and are based on Islamic finance. December 28, Angel Investment. Table of Contents. Share Post. Share on facebook. Share on twitter. Share on whatsapp.

Share on linkedin. Meriem Arif. Login with Facebook Login with Google. Top Posts. Islamic P2P Crowdfunding Explained. How to Earn Halal Money? It can take time to know where in their local ecosystem to look and time to build a reputation as an investor founders want to work with. But once an angel is more experienced and better known, or once they become part of an established group or fund, the companies tend to find them.

Reputation and referrals tend to bring deals in. Important referral sources include:. Investors looking for syndication partners or looking to help an interesting deal that is not a fit for them. Other angels in your group, fund or network who are active in their community mentoring, advising, judging business plan competitions, teaching and speaking.

Some solo angels may have firm criteria or a checklist they follow, but many will be relatively informal and follow their gut about which companies to follow up on. Angels in a group, network or fund will typically put the deal through some kind of scouting or screening process to check it to weigh:. Get Seraf Compass articles weekly ». Overall, the process impact investors use is more similar than different, but it does have some distinctions.

Impact investors are still concerned with the usual investor questions such as viability of the business, the quality of the team, the size of the opportunity, the urgency of the problem, the viability of the solution. However, in addition to the normal business evaluation, impact investors are considering the motivation of the founders and their passion for the cause.

Unlike VC investing where a relatively small team controls the decision-making for a large pot of money, the angel decision-making is very distributed. In effect, a consensus needs to be built. To make any kind of decision, most angels need to spend time with a team to hear their story and interact with them live.

It might be an informal pitch in a coffee shop to a couple of solo investors, or it might be a more formal and organized pitch as part of a regular forum set aside for startup pitching. For example, most angel networks hold a monthly or quarterly meeting where promising startups efficiently pitch many angels at once, typically using a formal slide presentation on a screen.

Pitches like this can be stressful for entrepreneurs and their teams because they are usually time-limited. It is difficult to be in front of a large audience, let alone deliver a complete yet compelling synopsis of a lot of detailed information. But they are time-efficient compared to the gallons of coffee an entrepreneur would have to drink for an equivalent number of meetings.

Some angels might invest after just a pitch, but most undertake at least a modicum, if not actually a significant amount, of due diligence review first. Although it takes different forms, the diligence process is really about asking questions and trying to verify the key assumptions and spot the easily avoidable mistakes. As it progresses, diligence may involve some modeling and scenario building.

For solo angels diligence might consist of a couple more sit downs with the team and a bit of research or reference checking. For networked groups it might be a more formal team effort focused on digging into a longer checklist of issues and preparing a formal due diligence report which can be used by peers and syndication partners.

Actually, the next step begins before the end of the diligence process. If the diligence is going well, the angel or angel group manager leading the deal will begin to talk to the entrepreneurs about prospective deal terms. There also might be a sanity check before diligence even starts to make sure people are in the same ballpark.

It is at this point issues like deal structure , valuation and deal terms are discussed, with the goal being to negotiate a mutually acceptable set of terms and document them in a termsheet which can be shared with the diligence report when it is complete. No, you still have to find the money to fill the round.

So while you are finishing diligence and talking about termsheet issues, you are also trying to get a sense of how much investor interest is currently engaged, and how much additional money needs to be found. This is the beginning of the process typically referred to as deal syndication. The goal of the entrepreneur and the lead investor is to bring desirable investors in as quickly as possible.

Naturally there is some tension between fast and desirable, because you cannot hold up your closing forever waiting for preferred investors when there is money being offered by perfectly acceptable investors. By preferred and acceptable, I am talking about more than just reputation and whether they are nice people. The key issues are alignment amongst investors and alignment between investors and the management team , and value-add in terms of expertise and connections.

It is obviously also necessary to find investors who will accept the terms as negotiated; if every investor wanted to renegotiate the terms of the deal, chaos would ensue and the deal would never get done. Before any checks can be written, the definitive legal documents need to be written up, and a closing needs to be prepared.

Termsheets typically contain a clause specifying whether company counsel or investor counsel will take the pen on the first drafts. Regardless of who is in the lead, someone has to do it, and they use the termsheet as the instructions for how to draw up the documents. In theory this means the process is simple and straightforward since all the big issues are already decided and memorialized in the termsheet, but in practice this stage is actually a field of sticky wickets.

A termsheet is a page document formatted with big margins. The definitive legal documents in a priced equity round are reams of pages of paper. There are many concepts in a termsheet that are open to interpretation or require additional detail to be supplied as part of the document implementation.

As a result, there are plenty of opportunities for the non-drafting party to disagree with, and want to make changes to, the first draft of the documents. Usually counsel experienced with these kinds of deals are involved and since they are familiar with market norms and standards, the first draft is not too far off the mark. So deal documents can usually be pulled together fairly quickly. Typical might be a week to draft, a week to negotiate and a week to finalize.

A fast process might be half that time. A closing date and process is outlined, and the definitive documents are sent to all the investors who have soft-circled committed money to the deal by indicating they intend to invest. The documents are accompanied by instructions for returning signatures, mailing checks or wiring funds.

Creating a good closing package is somewhat of an art - done well it can be orderly and efficient; done poorly it can lead to frustrations, mistakes, and delays. When you have a lot of companies in your portfolio, there is a lot of this kind of desk work, and productivity and organizational hacks are essential. Yes and no. It is definitely the end of this financing round phew , but not close to the end of the work you need to do on this company. Once you are an investor, you have every incentive to help in any way you can with board advice, mentoring, introductions, and possibly board service.

Stages of angel investing site forex test version

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stages of angel investing site

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The term angel investment is fairly common in the world of investment today.

Stages of angel investing site The biggest difference has to do with perspective about capital intensity. When you ask most angels, they usually come up with one of three answers. In addition, angels tend to enjoy and be more interested in the companies at the earlier stage. Angel investors typically finance a business startup at the very early stages. Get Seraf Compass articles weekly ». Forex is the best economic calendar on will be the case whether they are successful or not.
Forex in chelyabinsk addresses No investor likes to withhold their financial support, but ordinary investors recognize that good money after bad is just a waste. Important Considerations for Managing a Portfolio Return on Investment ROI — understanding the typical timing of return and potential outcomes Dilution — the potential for future dilution, anti-dilution protections, and net-positive dilution Follow-on Rounds — multiple follow-on rounds and follow-on investment strategy Stages of angel investing site Losses — loss of capital and taxation Exits — liquidity events as a whole, acquisitions, IPOs, secondary sales, and recapitalization Detailed information on all of the above bullets can be found in our guide titled: Managing A Portfolio of Startup Investments. What is an angel investor? The investing information provided on this page is for educational purposes only. VCs make an investment after a startup has been validated in some form metrics, customers, revenue, etc.
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There are other organizations such as Funding Post, AngelList, Microventures and Angelsoft that showcase various angel investment opportunities. With most investments, higher risk generally means higher potential rewards. Since angel investors take on such high risk, they seek high returns. If their investment works out, angel investors could potentially earn times their initial investment or even more, according to the Corporate Finance Institute, a provider of online financial education and certifications.

See if your investment is a qualified small-business stock. Portfolio diversification is another reason why angel investing can be compelling. Investing in early-stage private companies has a different risk and return trade-off compared with investing in traditional stocks and bonds.

Angel investors, especially those who are entrepreneurs themselves, may enjoy being involved in new industry developments and want to boost startups with ideas they approve of and hope come into fruition. Angel investing can be risky since the investments or businesses are unproven. While making money is possible, many angel investors lose their entire investment. This is why experienced angel investors frequently make investments in multiple startups throughout various industries — this helps to spread risk.

Because the return on a successful investment is high, one win can more than offset the cost of the other failed ventures. For the startup to grow to the point where investors can make a rewarding exit, it can take seven to 10 years or more. What is an angel investor? How angel investing works. How to become an angel investor. Know how to source deals.

Why consider angel investing. NerdWallet's ratings are determined by our editorial team. The scoring formulas take into account multiple data points for each financial product and service. Learn More. APY 1. APY 0. Terms apply. Risks to keep in mind. On a similar note Dive even deeper in Investing.

Explore Investing. Get more smart money moves — straight to your inbox. Sign up. NerdWallet rating NerdWallet's ratings are determined by our editorial team. Unless you are truly accessing and reviewing company confidential information, such as full customer lists, source code for a patentable software algorithm, chemical formulas, or other intellectual property that represents the core innovation of the company. Unsophisticated founders may ascribe a lot of value to their idea. Experienced investors know that there are very few unique ideas and that the largest determinant of success is whether the team can execute the idea quickly and effectively.

There are a lot of rules and regulations governing how companies can solicit and raise capital from investors. These rules exist at both the federal and state levels. At the federal level, the Securities and Exchange Commission is the primary regulatory body. Each state also has its own securities division in charge of regulating the issuances of securities in its jurisdiction.

The term security is defined very broadly under U. While these scenarios are not common, it is worth understanding the law so that you can avoid investing in companies that are flaunting it. Understanding the rules will also help you understand why in some environments companies do not discuss fundraising as part of their pitch, and why in other circumstances companies might ask you for specific documentation on your income or assets. There are red flags to watch out for here as well, such as third parties soliciting funds for a startup for a commission.

Startups raise money from accredited investors : either individuals or entities who meet the qualifications set by the Securities and Exchange Commission. According to the SEC, investors must meet a minimum level of income or assets either high net worth or high income in order to be accredited. The SEC rules make it challenging for companies to raise money from non-accredited investors who do not meet these standards.

An exemption or exempt offering is an offer and sale of securities that does not have to be registered with the SEC because the SEC has adopted an exemption from registration that you can qualify to use. The two most common ways for private companies to sell securities are through the following exemptions:. You might wonder, do companies engage in general solicitation if they pitch to an angel group?

If you accept a board seat, or if you become an executive officer of a company, the fact that you are a member of the board or an executive officer of a company may be disclosed on the Form D the company files with the SEC. Companies are required to file the Form D with the SEC when they raise money in a Rule offering, and they are required to list on the Form D the directors and executive officers of the company.

Filed Forms D are publicly available on the internet, and many media outlets watch these filings so that they can report any interesting news. If you do not want your name disclosed in this process, you should take special care to require the company to agree to keep your name confidential. Make sure the company is complying with the law in regard to its fundraising. When you are evaluating a company, you should make sure the company is following the rules of whichever securities law compliance path it chose.

If the company is telling you that it is conducting a Rule b offering, but it is advertising its securities offerings on its website, that is a red flag. It means that the company is not complying with the law. The company may not be getting good legal advice, which is a signal that other things might be amiss as well.

In this section, we will look at finding potential investment opportunities and how to determine if they are interesting enough to warrant investing time and effort in due diligence. The goal of due diligence is to investigate and validate all the aspects of the pitch that got you excited.

Legal due diligence will follow. This effort is focused on making sure there are no red flags in how the business was formed and structured, how it has been funded to date, and whether the founders and early employees have assigned their inventions and innovations to the company and are properly motivated to stay with it.

To have the opportunity to make a good investment, you have to see a lot of deals. Deal flow refers to the number of potential investment opportunities you review during a particular period. Ideally, if you are active, you will have the chance to review, if not all, a substantial portion of the investment opportunities in your particular area. There are a number of benefits to investing in local startups.

You will want to get to know the CEO over the course of several meetings. Many of these activities are more easily done if the company is within an easy drive. In the event that things go poorly with the company after you invest, or they are unresponsive to your inquiries, you will be able to just go to their offices and talk to them. Finally, by investing locally, you will be helping your local startup ecosystem. You can learn more about investment opportunities in your community through the following channels:.

Angel investing groups. Angel investing groups are a great place to get exposed to potential investment opportunities. We discuss this in detail in Joining an Angel Group. Let your network know that you are interested in making angel investments. Mention angel investing on your LinkedIn profile. You will be surprised at how many people reach out to you. You can also join investor-centric networks like AngelList , where many entrepreneurs may be looking for investors who share an interest or expertise in their industry.

Whether you are interacting with the local startup community or creating a profile on a national site like AngelList, it will be helpful to have an elevator pitch about the types of deals you are interested in. You might be interested in a particular industry or technology focus or a stage of company. Communicating your desired focus will help get the right deal flow while minimizing the noise. Alternatively, many angels prefer to remain as anonymous as possible. That is fine too.

There is really no wrong way to go here. Do you know what the key success factors and milestones are for a medical device startup? How about a messaging app targeted at teens? Do you know how long it takes to sell an enterprise software solution to Fortune company CIOs? So stick to your knitting! If you have had a career in enterprise software sales, you will understand intuitively the challenges in selling in that market. You will have colleagues and friends in the industry that you can contact to litmus test some of the assumptions being used by the startup you are considering.

You will be in a much better position to evaluate an idea, scrutinize the team, gut check the financials and perform effective due diligence if you are looking at companies in an area you know something about. If you do decide to evaluate companies in areas outside your expertise, it makes sense to do so with the support of an angel group or someone in your network who does know the industry well. You can lean on the knowledge of other angel investors, but it will always be easier if you yourself know—or are at least willing to learn—what questions need to be asked and can converse with a founder intelligently.

They are all important, so we will cover how to evaluate all three below. Ideas are everywhere, and there are very few unique ones. There is a long road between the idea and an actual compelling product, and longer still to a revenue-generating business and longer still to profits! It is the team that is going to build the business out of the idea, so you should be as confident as possible that the people pitching to you are going to be able to execute. Many believe that one of the best predictors of success is an entrepreneur who has built and exited one or more successful companies.

Absent that scenario, below are some key things to consider after hearing the pitch. Your goal here is to figure out whether the team is particularly well-suited to tackle the problem that they have set out to solve because of their skills, background, and experience. A good team generally has domain expertise in the industry that they are now planning to disrupt, and ideally in the functions that are core to succeeding with that disruption.

The other aspect of an investment opportunity that can sway an investor is the sheer size of the market opportunity presented. A typical scenario for a startup is that they are targeting a large market, but are starting with a very focused market entry strategy. This is a smart approach: create a beachhead and initial traction with a very focused product in a very specific market and then expand to the broader market as their resources for engineering and sales grow.

So while the initial market may be small, the total addressable market TAM in which they believe their product, service, or approach will be superior, should be large. Angel investors will often categorize an idea as a painkiller or a vitamin. The assumption is that if you are addressing an actual problem a customer has, they will have a greater urgency to purchase your product or service and will more readily take on the risk of buying and using a product or service from a startup.

B2B startups have a particular challenge in that they are asking their customers to take a chance on the product and the company. The product has to be really compelling for the buyer to take that chance. Even for B2C companies , it can be challenging to get consumers to change their behavior. The product has to be significantly better than the alternatives to get consumers to switch and stick around. Sales to paying customers is the greatest validation of an idea, and the product that delivers on the idea.

Traction also shows that the company has actually built a working version of their product, and that they can sell it to businesses or generate consumer demand, for B2B or B2C offerings respectively. Traction tells you unequivocally whether the intended customer is willing to use and pay for the product. You do not need to be an expert in the domain or up to date on the competition, because the customers are making rational decisions with all that information.

A little bit of competition—especially from other early-stage companies—is a good thing: competition validates that a market exists. Hopefully, the company in question has some well-articulated advantage over the competition. Crowded markets are more challenging for investors and companies because it is harder to define a clearly superior product or differentiated value proposition when there are lots of products in the mix.

Even if it is a clearly better widget, it is hard for new entrants to rise above the noise and gain significant mindshare. In addition to looking for a first-to-market advantage, investors often look at whether the company can build barriers to competition.

If the idea proves great and the company begins to get traction , they will also gain the attention of potential competitors who could move to address the same market:. Business due diligence is where things start to get a bit more serious. Due diligence digs deeper and sometimes wider to validate whether the story told by the entrepreneur stands up under scrutiny. Due diligence or business due diligence refers to the process by which investors investigate a company and its market before deciding whether to invest.

Due diligence typically happens after an investor hears the pitch and before investment terms are discussed in any detail. The amount of due diligence that is done on a company is the factor most correlated with investor return; the more due diligence you do, the more likely you are going to invest in companies that make you money.

Rob Wiltbank looked at the amount of due diligence completed by angel investors, and found that the number of hours of due diligence performed on a company was one of the key success factors in angel investing outcomes.

We cannot overstress the importance of due diligence. These are likely angels investing alone, and making those investments based on prior relationships or the recommendation of a fellow experienced angel. In part, this is because they have more money and less time. They can afford to lose the money on some percentage of investments more than they can afford to spend the time doing rigorous due diligence on all their investments. Below are a few personality traits to consider.

Throughout the diligence process you will likely have multiple conversations with the founding team. Try to assess some of these important traits:. In Evaluating Opportunities we discussed why you want to make sure the startup in question is targeting a large market.

In performing due diligence , you may want to do a quick check on that market size calculation. A common mistake entrepreneurs make is to use the value of the target industry they are selling into, rather than the value of the product or service they are selling. Using a fictitious example:. The total addressable market is not the value of cars sold, or even the value of wheels sold: it is the value of sensors sold.

Because traction is such a critical indicator of potential success, it is important to do diligence on the stated customer count and customer engagement and motivation. This was a consumer and small business product. These customers were on a free tier of the product, and the company determined that it could not monetize them, so it pivoted to a different value proposition.

Entrepreneurs know how important customer traction is to investors, so the pressure to present numbers in a positive light can be extreme. If the company or its valuation is heavily dependent on a particular distribution contract or customer letter of intent LOI , ask to see it. In every pitch deck there should be a slide about competition. If you were the inventor of the first car, for example, you might have been tempted to say that there was no competition; but in fact the competition was horses and carriages and trolleys and trains and bicycles and human feet.

This creates a temptation for founders to be dismissive of certain competitors or to leave them out of the competitive slide in their pitch altogether. Evaluating competition is very company-specific, but the following are some general guidelines for angels to follow when doing diligence on competition:. Start with the list of competitors provided by the company and look at those products closely. Who are they selling to?

How are they positioned? What do they cost? If it is a product that you can use yourself, then use it as much as you can even if you are not the target customer. Is it elegant and effective or confusing and buggy? It is not uncommon for an entrepreneur to show a very polished demo of their product using a very specific scenario, and it may turn out that the product only works elegantly under quite specific constraints.

Now you should try the app yourself and search for glacier walks in Iceland, rock climbing in Patagonia, whatever you can think of. Are the results just as good? Every pitch deck has a financial projections slide showing that in 3—5 years the company will have millions or tens of millions of dollars in revenue and be profitable.

Those projections come from a financial model built on a set of assumptions about growth rates, customer transaction size, customer acquisition costs , attrition rates, and others more specific to the type of business. The model and the assumptions will be very specific to the type of business. Especially in B2C businesses, the profitability will be very sensitive to some of those assumptions.

Any of the pirate metrics mentioned above will likely have big impacts on profitability. The entrepreneur should be able to defend any critical assumptions in the model by pointing to comparable businesses. Ask for a copy of the model and work with it until you understand what the key drivers of growth and profitability are. Test the impact of the key assumptions:.

That sounds impressive, but how many of those downloads turned into real engagement that could eventually be monetized? A few probing questions revealed that the founder knew one of the editors of the App Store and was able to get the app featured.

It turns out that 30K downloads is pretty typical for a featured app, and that once that visibility was gone, the download rate fell precipitously. The entrepreneur was not lying, they were just touting a vanity metric. While downloads are necessary, they are not sufficient or directly indicative of potential profitability. The meaningful metric is how many qualified sales leads came from the conference. On one of the first investor reports, the company touted how many different states they were getting web traffic from.

Not how many unique users were visiting the site, or the cost of that traffic, or the conversion rate to purchase. There are likely hundreds of web crawlers on the internet working continuously to visit and index every website.

How many states the traffic came from means absolutely nothing. Even website traffic means nothing until you can convert it at a reliable rate to a registration or a transaction. One can always spend money to buy traffic to a website via paid advertising. What matters is the cost of acquiring paying customers and for how long they continue to pay.

Legal due diligence is separate and distinct from business due diligence ; its purpose is to make sure that there is no reason from a legal perspective that an investment should not proceed. You typically turn to legal due diligence after you have completed your initial business due diligence and have come to terms on the transaction.

Should you hire a lawyer to help you with legal due diligence? This depends a lot on the circumstances of the company you intend to invest in, and your own comfort level. You may find it helpful to take a look at the legal and financial due diligence checklist from the Angel Capital Association.

Similarly, if you wanted to, you can check that the company has the appropriate business licenses. Typically, employees are not given ownership directly, but the option to purchase stock in the company, an option that can be exercised not right away but over time, referred to as vesting. Equity can be awarded in different ways, most typically through stock options, but also through warrants and restricted stock awards.

Compensatory equity awards are awards of stock, options, restricted stock units, and similar awards issued to service providers of a company. Under the securities laws, companies may issue compensatory equity to service providers without those service providers being accredited if they comply with another exemption , such as Rule In almost all situations this means the founders have missed something.

It is not uncommon for founders who try to do it themselves to not timely file 83 b elections, fail to adopt bylaws, fail to execute stock purchase agreements at all, and other mishaps. If you are reviewing the corporate documents for a startup, you should see at least the following documents:. Most people procrastinate on their taxes. Entrepreneurs are busier than most of us, building a company and a product and hiring and selling and raising money.

With a small team, there may be no one focused on finances and accounting and taxes. Entrepreneurs tend to focus on how much cash they have and how quickly they are burning through it. Even if the company has no revenue, it may still need to file tax returns; and even if it is not making a profit, sales and payroll taxes still accrue. You can check in the public record whether a company has tax liens filed against it or any other lawsuits.

But here are the general tax issues to look into as part of your legal due diligence :. Section 83 b elections. The founders should have given the company copies of their filed elections. Our goal is to give you enough background and context such that your time with a lawyer is efficient. We will discuss for which parts of the investment process you or your lead investor would engage legal counsel, and additional considerations if you are investing alone.

The lead investor typically makes the decision on when to bring in legal counsel and who to hire to represent the investors. They will also lead the negotiation over who pays for legal fees to document the deal. The sections below are useful for the scenario in which you are responsible for, or have influence in, deciding when to bring in an attorney. When you are first introduced to an angel investing opportunity via a pitch, you will likely get a very high-level summary of the proposed investing terms from the entrepreneur, such as:.

Whether you should engage your own lawyer depends on a number of factors, including your level of experience, how much you are investing, and the context in which you are investing. The group of angels with whom you are investing should have a lawyer representing their interests collectively, including yours.

In addition to managing deal terms, the lead investor in the group will play a role in assessing the need for and organizing any legal due diligence on the company. If you have any specific concerns regarding legal due diligence , whether that involves corporate formation , governance , or intellectual property rights, you can bring those concerns to the lead investor. If you do not feel your concerns are being adequately addressed, you can hire your own attorney to do a review.

This gets more common the larger the size of the round. Series A rounds very often have a fee reimbursement provision for the investors. It is less common in Series Seed rounds or convertible debt or equity rounds. The more you are investing, either individually or as a group, the more comfortable you should feel asking for this provision.

The trick is to use a lawyer intelligently so that you do not unnecessarily run up legal fees or upset the deal. A term sheet is a summary of the key business terms of the proposed transaction. It should be short, easy to understand, and it should be free of legalese—save perhaps a sentence about the non-binding nature of the proposal. Term sheets are helpful in reaching agreement on the principal business terms as they are very short pages and concise, and easily understandable by those at all familiar with the terms.

Each type of financing, e. For convertible notes, this will include interest rates, conversion conditions, and so on. For a preferred stock offering, the term sheet will cover price per share, liquidation preferences , et cetera. Part III will help you understand the common terms in typical angel financings such that you can quickly evaluate any term sheet you may come across.

Examples of the types of terms sheets you will encounter are collected in the appendix. Often accelerators and angel groups have boilerplate term sheets that they like to use as starting points in negotiations. There are typical terms and industry norms, but there is still quite a range out there. Some accelerators , like Y Combinator, put forth very entrepreneur-friendly term sheets and encourage very little negotiation of them.

Some angel groups put forth very investor-friendly term sheets. Once you have reviewed the types of investments here and seen a few in the field, you will start to get a sense for what is typical for different financings. The term sheet outlines the details of a specific financing and is usually non-binding save perhaps for exclusivity and confidentiality clauses.

For the deal to be closed, legal contracts representing the details of the investment terms need to be drafted, negotiated, and signed. These contracts and potentially amendments to corporate documents are referred to as the definitive documents. Definitive documents are the legal contracts between the buyers investors and seller the company that spell out in detail the terms of the transaction, and are drafted by a lawyer. The definitive documents will set forth the entire understanding of the parties.

The documents must be signed by all parties in order for a closing to be reached. Closing refers to the moment at which you sign the definitive documents requiring your signature, and send the company your money, typically either in the form of a check or a wire transfer. The company signs the required documents and delivers to you the security purchased. What definitive documents are will depend on the specifics of the transaction, but they typically include:. Companies typically issue convertible debt when they are not raising enough money to justify a preferred stock round.

Convertible debt is relatively straightforward. Convertible debt or convertible note or convertible loan or convertible promissory note is a short-term loan issued to a company by an investor or group of investors. The principal and interest if applicable from the note is designed to be converted into equity in the company. A subsequent qualified financing round or liquidity event triggers conversion, typically into preferred stock. Convertible notes may convert at the same price investors pay in the next financing, or they may convert at either a discount or a conversion price based on a valuation cap.

Discounts and valuation caps incentivize investors for investing early and not setting a price on the equity when it would typically be lower. If a convertible note is not repaid with equity by the time the loan is due, investors may have the right to be repaid in cash like a normal loan. Frequently a company will start a convertible note offering by showing potential investors a term sheet , rather than the note itself.

This is also true in fixed price financings. You can see an example convertible note term sheet and an annotated convertible note in the appendix. Immediate access to funds. An exception to this is if the convertible note document itself requires a minimum amount of funds to be raised, but this is unusual.

If a company is short on cash or needs additional funds to hire engineers or kick off patent work, this quick access to cash as individual investors come on board can be very useful. Lightweight deal documentation. A convertible note may be only a few pages long, whereas the documentation for a fixed price equity round typically spans multiple long documents. As a result, notes can be executed quickly and legal costs are usually significantly less. Ability to reward early investors.

There are several mechanisms for rewarding investors who come into the deal early, in addition to the general accumulation of interest over time. These can include a discount rate on conversion, a valuation cap , or some combination of those factors each of which will be discussed in detail.

It is also possible for the earliest note investors to get higher discounts and lower caps than subsequent convertible note investors. When a startup is trying to get its fundraising going it can be helpful to create inducements for the early investors. And as an investor, if you have faith in the company early on you can reap rewards for taking on the extra risk of being first in.

Angel investors used to complain that convertible notes prevented them from getting fairly compensated for taking on the added risk of investing in a very early-stage company. A priced round by contrast would allow them to lock in a low cost for their shares. Debt sits on top of equity; meaning, if the company goes defunct, debt holders are entitled to be paid first, before equity holders. Common provisions of a convertible debt financing include:. The maturity date. Usually 12—24 months.

A mandatory conversion paragraph. Specifies the minimum size of the round that the company must close in the future a qualified financing to cause the debt to automatically convert into equity of the company. Sometimes notes will specify what happens in the event the company defaults on the note. Most of the time the primary default is the non-payment of the note on the maturity date. Higher interest rates in the event of default are not common. It is not uncommon for a note to require that before an action is taken against a company to enforce the terms of the note, the holders of a majority in principal amount of the notes approve the action, rather than just one note holder.

What is the conversion discount? Preferred stock rounds are the most common type of fixed price round for angel investments—in fact, when investors and founders refer to a fixed price round or a priced round , they usually mean a preferred stock financing, although common stock fixed price rounds are possible.

Preferred stock is equity that has specified preferences relative to common stock and potentially to other classes of preferred stock. Those preferences are negotiated as part of the term sheet and documented in the definitive documents of the stock sale.

The most common preferences conferred to preferred stockholders are:. A fixed price financing or fixed price round or priced round is a type of financing where the investors buy a fixed number of shares at a set price in a common stock or preferred stock round , as opposed to rounds in which the number of shares and the price of those shares will be determined later such as convertible note or convertible equity rounds. By definition, in a fixed price financing a price must be set or fixed for the security being sold preferred stock, or less frequently, common stock by the company.

There are a number of factors that come into play when determining the price, and some of those factors are a function of negotiation. We talked about some of the advantages of convertible notes in the prior section. Convertible rounds are built on the assumption that the company will raise another round in the future that will fix the price of the non-priced round.

But if no subsequent round is planned, then a non-priced round is not a good fit, and a fixed price financing is called for. Investors may prefer fixed price financing over convertible debt so they can lock in the valuation of the company earlier while it is presumably lower and receive the rights and preferences associated with preferred stock.

On the plus side, raising a preferred stock round means they are raising a significant amount of money, and that is likely what they need to keep going and growing. The downsides for the entrepreneur are:. The benefits of the preferences that accrue to investors in a preferred stock round come generally at the expense of the entrepreneur and the pre-existing stockholders. Convertible note and convertible equity holders usually convert into the same class of stock the preferred that is creating the qualified financing and triggering the conversion.

The most common exception to this is when the convertible debt or equity is converted into a subclass of the preferred stock to avoid the problem of the liquidation overhang. Negotiating the preferences and pricing can consume a lot of legal resources, especially if they are unfamiliar with the terms. Investors like preferred stock rounds for a number of reasons:. If an investor has participated in non-priced rounds like convertible debt or convertible equity , they will finally know what they have bought for their money.

This is the case as long as the preferred stock round is a qualified financing that converts the convertible notes into stock shares and any convertible equity into actual stock shares on the cap table. The investors get specific preferences reflected in the definitive documents that can improve their outcomes in both good and bad scenarios, and sometimes give them a measure of control beyond what their specific share count would provide.

The term sheet for a preferred stock offering will contain the following key elements:. The type of security for example, series A convertible preferred stock. The topics below are important elements of a preferred stock financing. These issues may or may not be represented in the term sheet. In early-stage company financings, preferred stock is almost always convertible into common stock at the option of the holder. It is also typically converted automatically upon an event such as an initial public offering that meets a certain size, or upon the election of a majority sometimes supermajority of the preferred stock to convert to common.

This clause in the term sheet will typically specify the conversion ratio of preferred stock into common stock always at a ratio and any events or other provisions that would impact that conversion ratio. For example, take a look at the Series Seed Term Sheet, which says:. Preferred stock term sheets come in a variety of different shapes and sizes. You can find example preferred stock term sheets at the following sites:.

Techstars intermediate-length term sheet. Some of these are newer to the angel investment world. Convertible equity is an entrepreneur-friendly investment vehicle that attempts to bring to the entrepreneur the advantages of convertible debt without the downsides for the entrepreneur, specifically interest and maturity dates.

The convertible equity instrument the investor is buying will convert to actual equity stock ownership at the subsequent financing round, with some potential rewards for the investor for investing early. The amount of the equity the investor is entitled to receive is determined in the same way as a convertible note.

As with convertible notes, the company avoids pricing its equity, which can be helpful when hiring employees. Convertible equity is expressly defined as not being debt, so it does not bear interest. Nor does it have a maturity date. As an angel investor, from time to time you might be asked to invest in common stock. Common stock is stock that entitles the holder to receive whatever remains of the assets of a company after payment of all debt and all preferred stock priority liquidation preferences.

Common stock does not usually have any of the special rights, preferences, and privileges of preferred stock although it is possible to create a class of common that does, such as a class of common stock that has multiple votes per share, or is non-voting, or that has protective provisions.

However, sometimes founders will issue themselves a special class of common stock with 10 or votes per share and protective provisions. Common stock usually has one vote per share, no liquidation preference , no anti- dilution adjustment protection, and no protective provisions. However—and though many angels will refuse to buy common stock—common stock deals are not necessarily bad deals.

Revenue loans are another relatively new financial innovation in the early-stage company space. In other words, the payment amount is not set and fixed like in a traditional loan. It goes up and down based on the performance of the business. A revenue loan may have a four-, five-, seven-, or ten-year term, and is considered repaid when the lender has received the negotiated multiple of the loan amount anywhere from 1.

They may or may not have any financial operating covenants. They may or may not have any equity component for example, they could come with warrant coverage. Revenue loans fill a gap between typical commercial loans and traditional equity-based financing instruments. They are often used by companies that have cash flow and are looking for expansion capital but do not want to give up any equity in the business.

For example, if a new coffee shop is doing really well and the owners want to open three more locations, they may not have the working capital required for that expansion. A traditional bank may not see enough operating history or might want personal guarantees from the owners along with constraining financial covenants. With a revenue loan, once those new venues start generating cash the owners can use margin on that new revenue to pay off the loan over time. The other advantage of the revenue loan structure is that if it took several months for those new locations to ramp up sales, the company would not be burdened with a high fixed monthly loan payment from a traditional loan.

The revenue loan payments would start low and ramp directly with the sales. A warrant is a contract entitling the warrant holder to buy shares of stock of a company. It is not stock itself. It is merely a contractual right to buy stock.

A warrant will set out:. In the sections so far covering the different investment vehicles, each section has included terms that are unique to or typically associated with that investment type. This section includes the general investment terms that could show up on any term sheet , regardless of the investment vehicle.

We have touched on many of these terms already, but in this section we will go deeper. We have grouped the terms into subsections, and you can use this chapter as a reference whenever you come across one of these concepts. The rights in this section address how you can participate in or get impacted by future investment rounds. Investors may want the right to continue to invest and thereby minimize their dilution as much as possible as the company grows. This is an unsophisticated and impractical request.

There is no realistic, practical way to accomplish this in a company that expects to raise multiple rounds of funding. Remember, everyone gets diluted, including the founders. The primary control mechanism is the board of directors and protective provisions. We covered a number of protective provisions within our discussion of preferred stock. Drag-along agreements are worth mentioning because they impact who is not in control of a transaction potentially you.

If you are a significant investor, you may want to negotiate a board seat. We cover boards of directors and boards of advisors in detail in Boards and Advisory Roles. If you do take a board seat, as part of the term sheet , you may want to insist that the company obtain directors and officers insurance to protect you in the event of a lawsuit.

What if you made an investment in an early-stage company and never heard from them again; or only received documents to sign when they wanted to authorize more stock? Many investors like to know what is going on with their investments, and the rights described in this section make sure that you as an investor can get regular updates and access to management if you want that. If an entrepreneur or lead investor who might be a major investor while you are not pushes back on inclusion of all investors in information rights, you can stress that there is no additional work required by the company.

The documents are already being prepared, and they just need to add you to the electronic distribution list. Terms in this section impact how and when you might get cash back out of the investment. We discuss liquidation preferences in the section covering preferred stock , since a liquidation preference is most typically a facet of a preferred stock financing. Redemption rights or put right are the rights to have your shares redeemed or repurchased by the company at the original purchase price or some multiple, usually after a period of time has passed perhaps five years.

It is also possible to prepare these provisions to allow redemption in the event the company fails to reach a milestone, or breaches a covenant. Representations or reps and warranties can cover a broad range of topics in a financing transaction and they typically get more thorough as the amount of money gets bigger. In general terms, a representation is an assertion that the information in question is true at the time of the financing, and the warranty is the promise of indemnity if the representation turns out to be false.

For example, a company might rep that they have no unpaid salaries, or that they are not currently being sued. We address two more specific reps below. If you want to get a taste of probably the most typical sort of representations and warranties companies give in private financings, you can review the representations and warranties in the Series Seed documents.

A capitalization rep or cap rep is a representation and warranty in a securities purchase agreement in which the company makes assurances to you about its ownership and capital structure. For example, the company may represent and warrant that it has authorized 10M shares of common stock and that it only has 2M shares outstanding. If they are wrong, the investor can sue for damages and remedies.

Below are definitive document agreements that can be associated with a broad range of financings. A Voting Agreement is an agreement between the voting stockholders of a company in which the parties agree to vote their shares in a particular fashion to ensure that certain persons or their designees are elected to the board of directors. The agreement must be signed by the stockholders, because under corporate law it is the shareholders who elect the directors of the company; if your agreement is just with the company your right will not be enforceable.

The two parties could agree that they would each vote their shares to elect each other to the board of directors. Understanding how ownership percentages in a company are impacted by valuation , and diluted as the company raises money and hires employees is crucial to being a good investor and a smart entrepreneur. This section will walk through these key concepts as we tell the story of one fictional company.

You may have heard of A valuations for startups. The common stock in a private company can be valued through a formal process called a A valuation. The pre-money valuation is the agreed upon value of the company immediately prior to the investment. The pre-money valuation is the single most important factor, but not the only factor, in determining how much of the company you will own when you invest a specific amount of money. Dilution is the decrease in ownership percentage of a company that occurs when the company issues additional stock, typically for one of the following reasons: to issue to a co-founder who came on after incorporation, to sell to investors, or to add to its stock option pool.

When a company is formed, the certificate or articles of incorporation states the total number of shares the company is authorized to issue, called authorized shares. If the company decides it needs more shares at some point, it will need to amend its certificate or articles of incorporation, and that typically requires approval of a majority of stockholders. Authorized shares can include common stock and preferred stock. Issued and outstanding shares are the shares that have been issued to founders, employees, advisors, directors, or investors.

Issued and outstanding shares do not include stock options that have been reserved in the option pool. Ownership percentage calculated on an issued and outstanding basis is determined by dividing the number of shares owned by an individual or entity by the total issued and outstanding securities. In this section we will begin our example of a fictional company to explain some more key concepts, and illustrate how valuation and dilution effect ownership as represented in the cap table , starting with the initial company setup.

They retained a well-known startup lawyer who incorporated their company in Delaware and helped them assemble and execute all of the correct documents with respect to the formation and organization of the company. The corporation was initially authorized under its charter to issue a total of 30M shares, 25M shares of common stock and 5M shares of preferred stock.

Thus, the company had a total of 30M authorized shares. The stock option pool is a specified number of shares set aside and reserved for issuance on the exercise of stock options granted to employees under a stock option plan or an equity incentive plan. Equity incentive plans have more awards available under them to issue than stock options they also have stock bonuses, restricted stock awards, and sometimes other types of awards as well.

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Raising Seed \u0026 Early Stage Capital from Angel Investors


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9 Steps to Become an Angel Investor

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