Angel Investing is Not Charitable Giving

A question and answer thread on a new online expert forum follows below. While the expert providing the answer did a nice job overall, the idea that angels are investing for more than monetary gain was mentioned. This line of thinking is used far too loosely in some startup conversations. Almost all angel investors, aside from relatives and friends, are doing so primarily with an expectation of financial return requisite with their risk.

It is true that many angel investors enjoy the startup process as part of their justification for participation.  This should not be mistaken for a discounted interest in a  healthy financial return.  In fact, angel investors, unlike most VCs, are always investing their own money. They do not have the mindset or expectation of getting a 1 in 10 return on their portfolio with funds from LPs.  So, entrepreneurs should be mindful of the idea that the term “angel” does not denote “donor” in any way shape or form.  Rather, it designates someone who early on steps in financially and assumes the risk other investors were not yet willing to take.

Read the full thread below…there are some noteworthy points.

Q: Any best practices worth sharing on how to negotiate with seed-round investors to get the best deal? What should I do if we both sides cannot agree to a specific amount?

A: In negotiations I choose to frame “the best deal” as having three dimensions:

1. What I judge as feeling good about and reasoning is a valuable outcome to me
2. What the other party intends to feel good about and reason is a valuable outcome for them
3. What a Greek Chorus for the world would agree is a valuable outcome for both of us and the world at large…

This is the “win-win-win” alignment that creates the governing effects. This can lead to a good start continuance or end of net positive collaborative relationships.

To achieve this we need to understand that outcomes are not always financial or zero sum. With angel investors there is so much more to value than their money alone. In fact that’s why they’re called “angels” and not piggy banks. They actively watch out for you in some way that ensures increasing the probabilities of your early stage startup success.

The best practice is to get explicit (put it down in writing) about the desired outcomes for all parties. This means negotiating with yourself first to achieve clarity and priority of value…

Q: Would you rather have 90% equity ownership of a $250k company or 30% of $10 million company in 1 year?

A: If you are clear about the outcomes you want and if your angels are clear about what they want, then you both can sit on the same side of the table with an opportunity to be creative and DESIGN your seed stage relationship to achieve both outcomes in collaborative fashion of growing your company together.

…AND if your outcomes are not aligned from the start about growing the company, then its very important to discover those facts as early as possible BEFORE you negotiate terms. And if you and your angels can’t agree on the future outcomes of your company and instead see each others’ vested interests as competitive then you have two options:

a) search for different angel investors
b) bend them to your will or bow to theirs and suffer in learning to like it.

It’s always a best practice to turn negotiating into an opportunity for collaborating creatively on the same side.

 

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Equity Crowdfunding Has Promise But Doesnt Yet Move the Needle

woman in moneyThere is more disinformation about equity crowd-funding and the JOBS Act than just about any body of law of the past few decades. Xconomy just ran a post that does little to illustrate any real information on some of the new state rulings on the matter, but you can check out their piece entitled: Startups and 13 States Jumpstart Equity Crowdfunding Without SEC. The problem with this piece and much of the information that circulates on the issue is that they make the new rules seem as though startups are entering fundraising nirvana. In reality there is no evidence that significant new angel dollars have entered the marketplace since the JOBS Act. In fact the restrictions around investor accreditation have made things worse for companies engaged in general solicitation.

One of the leading experts on this topic is attorney William Carleton. His most recent post on this topic deals with the changing rules around who is eligible to invest in PE and who is not. You can read his post HERE.

The reality is that none of the new rules have yet expanded the universe of available capital because they havent empowered new sources of capital to enter the game. Startups always have a hunger for capital and continue to hope that the marketplace for capital will get more efficient and easier. But the problem that needs solving isnt a startup demand problem, its a capital supply problem; and that means addressing the needs and interests of current and potential investors.

 

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Seed Investments Online: Expect to See More

crowdfundingA recent article in Reuters Venture Capital Journal, Seed Investing Moves Online, discusses the force of the recent movement toward online crowd-funding. The author specifically discusses AngelList – the most well known of the crowdfunding websites:

In the most basic sense, it is a crowdfunding seed marketplace connecting investors, entrepreneurs and syndicates online in real time, opening access to capital, improving deal efficiency and democratizing investing by enabling ad-hoc collections of angels to compete for deals with established off-site funds. Pretty powerful, right?

That’s only the start. Add to that the transparency the site provides and you have a mechanism for online portfolio tracking, deal sourcing, investor research, measuring deal buzz, and sector and investment trend analysis using a rich database of aspiring companies.

Suddenly powerful becomes useful. The site is no longer just a social graph for investing, but a knowledge tool.

Saying that online investing is not a trend to ignore, the author expects the investment landscape will change. With similarities to AngelList, angelMD is different in that it focuses strictly on the medical sector, bringing physician investors and medical startups together. You can browse the startups on angelMD here.

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