After interacting with numerous VCs, Angels and Founders, i realize that while there has been much improvement in the quality of our founders and some improvement in the VC quality, there is much lesser improvement in the Angel scene. That is one of the reasons why we started AngelCentral.co - to build a community of competent and effective angels in ASEAN. So here is a list of key things Angels should do both pre and post deal. Actually many of the points apply to early stage VCs too.
1) Respect the founders!
Remember that the real stars of the show are the founders. Bearing this in mind helps with many decisions and where in doubt defer to the founders who are taking the most risk and pain. So any behaviour that is contrary to this is a big no no.
Eg. i have attended angel pitches where angels are eating dinner and not taking founders seriously during pitches. Or angels that badger founders over every small detail to the extent the angel is causing the founder stress.
A good angel supports the founders as their earliest cheer leader. We help with thoughtful experience sharing, sometimes emotional burst outlet and can be a sounding board for the founders until they scale the business and raise professional money.
2) Keep terms simple
Some angels try to add too many terms. Here are some i have seen :
a) Tranches. Some angels try to mitigate their risk by investing half first and half later upon certain milestones. While this is fine in principle, it would be easier to invest half now and have a pro rata right to invest next round. That frees the founders up to choose best investors and also frees your capital up too. We too, have been guilty of this in our earliest deals but have stopped since then.
b) Board seats. Don't insist on board seats unless you add good value and the founders want you. I have heard of at least 2 good founders with successful companies that have to spend time and energy to kick out their earliest investor who has a board seat. What a waste of effort.
If the concern is on keeping up to date about the company, ask for information rights for the first few rounds. Information rights allow you to keep track of the company and so you can make better decisions subsequent rounds.
c) Nitpicking on agreements
We are not lead investors, we are angels who follow rounds or who do the earliest rounds. As such a simple preferred share structure or convertible note with cap will do.
What you do need to ask for as an Angel is pro-rata rights and information rights. The former so that you can continue to invest in successful startups as it is core to a successful angel portfolio that you maintain ownership as much as possible in winners. The latter so that you can value add with sharing, network and so that you can track how the startup is doing. This is critical and as an Angel you need the founders to agree to give you these terms for at least the next 1 or 2 rounds. Walk away from deals and VC leads that don't offer this.
3) Be quick
One of the key advantages of Angels is that we move fast. A rule of thumb should be to make soft commits (agreeing to an investment pending lead investor and min capital raised) within 1-4 weeks of listening to pitch and receiving information. Most angels do this well. Also be quick to sign subscription and shareholder agreements. In terms of wiring money, do so once lead has done so. No need to be the first here just in case lead investor pulls a fast one.
Its the post investment phase that is less ideal. Post investment, you will need to sign resolutions, AGMs, exemptions etc. Please take this seriously and sign them promptly once you are satisfied the content is fine. Do not be an obstacle and make decisions on corporate actions quickly.
4) Be useful
This is understand but its not easy to do well. We have over 20+ startup investments and i have found that the best way to be useful is to highlight from experience. Eg. many b2c startups severely underestimate the challenge of overseas expansion. They usually aim for 3-4 countries using Series A funds. Our JobsCentral and portfolio experience has been that its better to expand to just 1 more country first and base country mgmt depth better be strong!
Another area to value add can be in terms of network. Potential clients are best. Followed by potential investors. But make sure the contact is the right one! Don't try to be useful but end up wasting founder time.
Strategic or functional value is also good. We have shared in depth on topics like How to use Culture in Workplace, Sales Team management and metrics, Joint Venture overseas etc. All these help your founders learn faster and execute better!
5) Have right expectations!
Depending on the value of the angel, it is reasonable to expect that after the initial startup phase and once the startup has grown and raised more capital, angels play a much less important role. So unless you can continue to value add significantly in terms of network, capital or experience, it is reasonable to expect to be less engaged as time goes by. For myself and Ning, we know we are valuable knowledge/experience wise for startups up to maybe 10M gross profit and with about 100-200 headcount. Capital wise, we are usually following up to Series A round. Once beyond that, we are happy if the founders find time to meet us once a year just as friends, some updates and of course, we hope for the big exit when the startup finally has a liquidity event. Then actually, we may become useful again if the founders want to become investors!
Of course, some of you may be strategic angels who run huge family businesses. In this case, you just need to have founders value you accordingly. Its either capital, network or knowhow. Show your value and insist on the rights that should be accorded to your value.
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