Angel investors? Doesn’t the name sound pretty cool ? “Yes”, Indeed. Angel investors are like business angels who help rescue the business of an entrepreneur. They are basically informal investors who strive to invest or provide capital for start- up companies with an interest in seeking equity ownership. Investors, in general, are really a savior to any business as they are the source of the inflow of capital for the functioning of a business. Angel investors generally accept to bear the risk in turn of little control or power.
Every entrepreneur has to rely on investor at some point of time to raise fund. And an entrepreneur should always be conscious and vigilant when he deals with the investor. He should make sure that all the legal considerations and formalities are fulfilled in good terms. An entrepreneur should also make it a point to mend good plans with respect to investor selection.
Do you desire to know, the vital legal factors or considerations to be kept in mind before choosing an investor before the funding process actually begins ? Well..!! The below- mentioned points would help you tick your checklist. These points would also help you assess what is the optimum option to carve on. Because a good decision and investor would bring fortune in the business.
1. Assure The Credibility Of The Lead Investor:
When you choose an angel investor make sure they have the capacity to negotiate the terms of investment in an appropriate format and also help the company in further development. Because a good lead investor helps in attracting qualitative investor for the enterprise.
Make sure the angel is trustworthy with good credibility because only then negotiation can happen in good terms. They hold themselves responsible for all the legal formalities.
2. Flexible Protocol:
Choose an angel who is ready to work flexibly with you according to your terms and condition.
Example: If you require a signature on any of the legal documents, then make sure he is ready to do it without the consent of the lawyer or reps or any other sort of warranty. Because again consultation and stuff would maximize your transaction fee.
3. A Friendly Angel:
Make an effort to choose an investor who is friendly and adaptive to the nature of your work. It would be better if he does not keep his feet in some crucial or critical areas. Being friendly points the following attributes:
- An investor who does not demands any board seat.
- An angel who does not desire to possess a voting right.
- Who would not poke into blocking rights when financing needs arise.
- Does not bother to micro- manage you and your work.
4. Pro- Rata Participation:
Earlier pro- rata participation was much inclined towards the court of larger investors than the angel investors. But now, angel investors demand their participation in pro- rata because of the fear of being pushed out by the big investors from the field. So make sure you define the terms and condition in clear terms through your legal documents.
5. Convertible Debt: A better choice:
Generally, an angel investor has more interest on equity. But choosing an angel who accepts to the terms and conditions of convertible debt rather than equity would be of good help. Because the features of convertible debt make your first venture and funding round pretty flexible and easier. And above all these can be converted faster and are less expensive when compared to the equity.
6. Valuation Insensitive:
Valuation basically refers to the worth of something, be it monetary or non- monetary. Whenever an investor lands into to do an investment deal, he would definitely ask you “How much is the company’s worth ? And why not ? Because they take the higher amount of risk. So, it is obvious that they expect a good valuation. At the same time make sure that you choose an angel who stays fair in valuation terms. Because angels look for the higher stake with less investment, whereas you would look for angels who are ready to pay higher amounts.
Therefore, it is advisable that you keep in mind all the above- mentioned points for lesser legal complication. Put in your best to carry out things in a fair and precise manner. Make to clarify the terms and conditions, working style, nature of funding and other important aspects prior to the deal. As, it would help you operate safe and sound.