Oct 10 2004

Angel and Strategic Investors

While I and others have recently done a number of postings on Venture Capital investors and their relationship with entrepreneurs, I thought I’d do a posting on handling other kinds of investors — angels and strategics.

Angel investors. My definition: high net worth individuals who put personal money into a company. The good: they’re typically your friends and family, so they don’t play hardball when negotiating terms. The bad: they’re typically your friends and family, so every dinner party you attend has the potential to morph into an ad hoc investor relations conference. The ugly: you feel awful if you lose their money or dilute them down.

Strategic investors. My definition: operating companies (not investment firms) that invest in other operating companies. The good: they’re typically some kind of business partner, so if they have a stake in your company, they will be more likely to help you. The bad: the person at the comapny who made the investment decision is usually a different person than the person with whom you conduct business, so the incentives are rarely aligned the right way. The ugly: unlike financial investors, strategic investors can change their philosophy about making other corporate investments for any reason or no reason and leave you without support in future rounds and with an unproductive player around the table that makes a future exit difficult by their mere presence.

At the end of the day, not everone is cut out to invest in startups. My biggest takeaways about these two types of non-financial/VC investors are:

1. Be very selective about who you let invest in the early stages of your company

2. Make sure angel investors acknowledge to you verbally (above and beyond the accredited investor rep they give you) that they are totally comfortable losing all of their money

3. Make sure angels and strategics understand that in order to preserve the value of their investment, they may need to continue investing in your company if you end up raising multiple rounds of financing

4. Without being unfair, try to limit the rights (or assign them by proxy to you or to the Board or to a lead investor) of less sophisticated financial investors who aren’t and won’t be close enough to your business to participate in major corporate decisions down the road. Along these lines, you should strongly consider selling both types of investors common stock, especially if it’s early on in the company’s life