angel investors to fund your start-up is not an easy job. Angel investors
have to be enticed into your sales pitch before they agree to finance any business
ordeal. According to David Amis and Howard Stevenson, co-authors of the book, Winning
Angels, The 7 fundamentals of Early Stage Investing, there are several steps
that first-time entrepreneurs must take to win over an angel investor.
Many angel investors will agree to finance people who fall into the third category.
Is it a common stock, a preferred convertible with various terms, or a convertible
note with various terms? A common stock is the simplest type of
equity investment but provides only a few safeguards to the investor. A preferred
convertible is more complicated but can benefit the investor to a greater
degree. Convertible notes allow no negotiation on price but offer
angels the most protection.
Angels tend to focus on the numbers, specifically their initial ownership stake.
They truly believe that will have the greatest impact on the future value of their
investment, so many will firmly bargain over what they feel their rights should
be. They also prefer to take their time during negotiations, not least of all in
the hope that you will eventually come around to their terms. Unless all parties
are aware of how the relationship will work out from the beginning, there is a potential
for continual problems. Business owners need to understand the needs of angel investors
and respect them.
Entrepreneurs, on the other hand, should also provide regular updates once a month
to all of their angel investors. Not only does that let the investors know what’s
going on, but it also makes them feel as if they are an important part of your company.
Communication, whether written or verbal, is crucial for establishing a healthy
rapport with your investors so that that everyone fully understands their role and
no discrepancies exist.