Nov
20
I don’t like posting negative comments about anything - particularly Angel Investors because I’m very fond of them and the concept as a whole. I had the privilege of meeting several experienced angels recently who added value to my business prior to any investment commitment.
However… I feel compelled to write about a story an entrepreneur told me recently about his circumstances. I’m not going to go into too much detail to protect the innocent.
The company is an early stage startup and the angel was one of the first offers the entrepreneur received. He accepted even though, as it turns out, the terms were horrendous. The angel is not very experienced in investing and the entrepreneur isn’t experienced at attracting investment.
The angel and entrepreneur meet once a week and the angel takes a very active interest in the company. The Angel doesn’t understand the industry and the entrepreneur and angel have very different views on the direction the company needs to take.
The conflict reaches a crescendo and the angel pushes the entrepreneur aside (I’m not sure how because I don’t have the investment details) and puts a new CEO in places who is also a friend of the Angel. One of the senior people in the small team decides they want the entrepreneurs new job and the company is swiftly moving into the hands of everyone except the founder.
There are always two sides to a story - especially when it comes to relationships. Bear in mind I only have the one side of the story. But here are some things I took away from this:
- Choose your angel investor wisely. The best angels demonstrate they will add value before they invest. You find yourself trying to figure out how you can get more of their time rather than how you can make them stay out of your cooking.
- Have a clear understanding of who runs the company. If the angel wants to participate in the day-to-day operations of your business, then you should have a conversation about them joining as a full-time executive. If they are uncomfortable with you running the company, then you should resolve that issue before the investment.
- Read the terms of your investment very carefully and understand how much control you’re giving away over and above the equity you’re selling. Can your investors fire you? Can they block an acquisition or force one?
- Be wary of angel investments that take a large amount of equity or provide an angel with levers to control your business. They may be a precursor to you getting shoved out the door.
Startups are a volatile business. Some days you have massive success, other days you encounter setbacks, and sometimes you find you plateau for weeks or more without any progress. Your investment partners need to have the experience to understand this and you need to structure a deal that is durable enough to last through the highs and lows.
