7 Tips On Drafting And Negotiating An Angel Investor Agreement
Do you know what to do if you come across an angel investor?
Many startups dream of having this kind of investment opportunity. However, some entrepreneurs don’t prepare for the day to actually come. If you find yourself with an angel investment opportunity, it’s important to know how to take full advantage of it.
That means knowing how to negotiate and start drafting an angel investor agreement. If you find an angel investor across the desk from you, you’ll be prepared to take the next steps. Sometimes, this can make all the difference on whether or not they’ll follow through with the investment.
Ready to learn what you need to know about an angel investor agreement? Keep reading!
What is an Angel Investor?
Angel investors are known to be crucial to the success of many startups. However, there aren’t any specific rules about what an entrepreneur can expect from an angel investor and vice versa. This can make working with this kind of investor confusing – and that’s why having a plan is so important.
These investors are highly sought after because no rules are governing what they can or can’t do for a business. However, this also means that they’re much more vigilant about which startups they’ll actually work with. Knowing how to negotiate and draft a good agreement might be what it takes to keep them interested.
Angel investors are generally either wealthy people with money they’d like to invest or fellow successful entrepreneurs looking to get in on the ground floor of a new project. On occasion, you might find an angel investor who’s a professional venture capitalist, but this is rare.
These people are willing to throw the cash that’s needed at the right startup to get it going. However, they won’t invest in just any business. In addition to money, angel investors may also give you advice, management support, and other kinds of help.
These investors will usually expect some things in return. They might be looking for an equity stake in the company or convertible debt.
Why Angel Investors Matter
Some business ventures don’t need angel investors to help them get off the ground. However, the more innovative your idea, the more likely it is that an angel investor can help.
Traditional types of lenders, like venture capitalists and banks, usually shy away from these types of ventures. This can leave angel investors as major source of startup funding.
Angel Investor or Venture Capitalist?
Both types of investors can help you get your business off the ground. Some people say angel investors are better because they have more flexibility when it comes to investing. But that’s not really true – angels aren’t better investors, just different.
The chances are good that you’ll need both types of investor. Venture capitalists can help by pulling funding from many different sources, including corporations, investment banks, financial institutions, endowments, and pension funds, among others.
Both angels and venture capitalists are usually looking for about ten times multiple returns on their investments. However, venture capitalists tend to give larger amounts of funding, but with more restrictions as far as revenue targets. Venture capitalists will also rarely invest in a pre-revenue company unless you’re offering something really innovative with a clear promise of returns.
Venture capitalists can be a great resource, but you do need to be careful with this kind of investor. Sometimes, their strict controls can actually hurt the company’s growth by getting in the way of the creative processes of innovation. If you don’t meet growth targets, the penalties from a venture capitalist can be harsh.
However, angel investors tend to be more flexible and foster innovation, making them the darlings of the entrepreneurial world.
Drafting an Angel Investor Agreement
What do you need to do to get an angel investor agreement in hand? Let’s take a look at the drafting and negotiating process.
1. Be Prepared
You’ll probably be excited about your business idea. However, you can’t expect that excitement alone to be enough to secure funding.
You’ll need to prepare and have all the paperwork ready to create an angel investor agreement. Get your financial statements, referrals, long-term plans, and a realistic assessment of the competition together.
No matter how prepared you are, you should prepare for one more thing: rejection. Your first potential investors may not bite, but don’t get discouraged.
2. Ask for Advice
Don’t go seeking help from angel investors before getting advice from people who have been there before. Business owners and managers who have worked with their own angel investor agreements can give you the insider tips you need.
3. Get Online
Finding angel investment opportunities is now easier than ever before. Modern crowdfunding sites have removed barriers between entrepreneurs and the list of angel investors – use them to your advantage.
4. Get a Lawyer
While you work to put together your angel investor agreement, make sure to get an experienced lawyer on board. They can review, change, and negotiate the agreement, so everything’s in order. Industry lawyers can even help connect you with angel investors in the first place.
Are You Starting a Business?
There’s much more to building a successful business than just getting investors. However, having a solid angel investor agreement can be the deciding factor in turning a good idea into a great business.
If you’re just getting started, we have the resources you need to get your business going. Step one is the name – check out our free NUANS Preliminary Name Search to see if your business name idea is available for registration.
