The Investment Process - Angel Financing

7/27/2019 The Investment Process - Angel Financing

1/17


2/17

Referral to Investor Initial Contact Follow Up Presentation Opening Moves Draft Term Sheet Valuation

OPENINGNEGOTIATIO

NS

Market and Technology Validation Intellectual Property Ownership and

Protection Financial Analysis Board of Directors and Board of Advisers Due Diligence Red Flags Final Term Sheet and Resulting

Documents Shareholder and Buy-out Agreements Deal Closing

THE DUEDILIGENCEPROCESS

The Investment Process

These are steps the investment process generally follows :


3/17

OPENING NEGOTIATIONSGet A Referral To Investor

Referrals through a resource trusted by an angel carry far greaterweight than many other introductions. Angels rely on theirlawyers, accountants, close friends, and business partners

people they are sure are looking out for their best interests.Initial Contact

Do not use a standard introduction for all angels; customize eachcommunication. Many angel investors will rule out entrepreneurson typographical errors or bad grammar and do not want towaste their time.


4/17

OPENING NEGOTIATIONSFollow Upo Know the difference between being persistent

and being annoying.o Know a noo Go to the investoro Ask for a reasonable period of time, such as

forty-five minuteso Do not stack meetings.


5/17

OPENING NEGOTIATIONSPresentationo Practice your presentation on safe audiences

repeatedlyo Customize your presentation if possibleo Dont directly ask for money, but open the door

for the money

o Promptly after the meeting, follow up with athank-you note, preferably handwritten.


6/17


7/17


8/17

THE DUE DILIGENCE PROCESS

Financial Analysis

Financial projections that include a diversified customer basewith multiple products off a broad-platform technology.

Markets being entered in a thoughtful, calculated manner, withstrong support for your choice of the first market.A well-mapped-out process for introduction of products.

Enough flexibility in your numbers and your mind to adjust yourprojections should an unanticipated market show strong

interest.Board of Directors and Board of Advisers

Having advisers will add value rather than just contribute namesand rsums to your documentation .


9/17

Due Diligence Red FlagsNo investment by founders

Numerous small investors, especially friends and family.

One-trick ponies.

Claims of no competition . Any portion of funds being used to cash out earlier investorsor pay liabilities.

Lack of participation by earlier investors (if relevant).

Prior financings have greater protection and more favorableterms.

A history of failure by the management team.


10/17

Due Diligence Red FlagsFamily business.

Multiple licenses required for practicing technology.

Heavy debt.

Hockey-stick growth projections.

Key assumptions missing in financials.

No board of advisers or board of directors, or only

internal parties on either board.An entrepreneur who wants total control.

Unrealistic valuation


11/17

FINAL TERM SHEET ANDRESULTING DOCUMENTS

The final terms should be a win-win.Also think about these questions:

Who is driving the investment terms? Venture capitalists almostexclusively require that the company cover their legal costs as well, but

angels typically foot their own legal bills.How many angel investors do you want? One of the manyadvantages of angel groups is the access to many angels and thelikelihood of multiple investors from the same groups or a couple of different groups.

What are your long-term funding needs and how does this affect decisions on early investors? Sophisticated angels will understandyour need for creating incentives rather than disincentives for follow-on funding. At the same time, you need to understand that angels are entitled to protect themselvesthey are taking a great risk on you.


12/17

FINAL TERM SHEET ANDRESULTING DOCUMENTS

In negotiating the deal, understand each of your angel investorsas an individual and let them get to know you, because angelinvesting is a personal decision.After all the negotiations, make sure your lawyer is experiencedin early-stage funding and able to guide you through thedocument creation process.

Shareholder and Buy-Out AgreementsFor professional private equity investors: Control of ownership is important.Buy-out agreements are particularly useful for companies that forecast highmargins and strong cash flow but have limited ability to realize the traditional

exit strategies, an acquisition or IPO.Deal ClosingOne key lesson should be to plan ahead so you do not run out of moneybefore investors are ready to invest.


13/17

SUMMARY THOUGHTSBe prepared; stay two steps ahead of your prospectiveinvestors.

Act professional; be professional.

Recognize that investors enter due diligence with thethought of doing a deal and are looking for deal killers.

Make sure you have a rough term sheet done beforeentering due diligence to avoid wasting your time and thatof the investors.

Discuss mutual expectations sooner rather than later.Dont think you can make an ill-fitted relationship work.


14/17

SUMMARY THOUGHTSDiscuss mutual expectations sooner rather than later.

Be open and honest at all times. Better you say something thanthe angel find out through other means.

Angels dont expect a fully staffed company, but you should

know what else you need to cover.Have the best advisory board you can assemble. Remember,angels put more stock in third-party opinions of your companythan in your own self-praise. You are supposed to be enthusiasticand totally committedthats passion, and essential, but it

means angels will take what you say with a substantial grain of salt.


15/17

Chapter 9

After the InvestmentCOMMUNICATE REGULARLY - ALL THENEWS Give an honest and regularlyinformation.

LEVEL OF INVOLVEMENT Angelinvolvement on our new company isdepending on their characteristic.

ANGEL VALUE Reason or valuesomeone becoming an angel investor.

Patience to exit


16/17


17/17

Successful Entrepreneurscharacteristic

Passion

Coachability

Open, consistent, andtimely communication

Honesty andforthrightness

Team approach

Strong adviserFocus on the end game

The Investment Process - Angel Financing

Documents

Transcript of The Investment Process - Angel Financing