Coat of arms of Sant'Angelo (rione of Rome)

Not all Angel Investors are Saints... choose carefully and prepare for the worst

Last week we discussed using Angel capital in your business.   Taking money from individual investors is a great way to fund your business. But beware… angels have their downside too!

Like Getting Married

If you think finding an angel partner can be tough, living with one can be even tougher.  Taking angel money can be like getting married: Before you run to the alter, be sure you know the person pretty well!

Think you’ve got a difficult business now?  Wait until you pick the wrong person to be your angel invesor.  Once you take their money, they may expect you to provide regular reports and to listen when they offer advice.  (And they will offer advice.)  They may even want to play an active role in your company.

The more your company relies on their money, the more closely they will watch your every move.  And when they say ZIG! and instead you ZAG!, the fireworks can fly.  I’ve personally met entrepreneurs who have walked away from their business when the angel investor started throwing his weight around.  Even worse, I’ve seen company founders fired (!) by an angle investor.  It can happen.

Of course, a strong investor can be a curse or a blessing, depending on how you develop the relationship.  Work with your investor(s) to take advantage of their wisdom and support.  Since angels tend to invest in the industries that they know the most about, you should look for angels who can lend their expertise to your particular business challenges.

It’s Payback Time!

Of course, all angels invest for one main reason – to increase their wealth.  Their money is not free, and they will expect a big payback in the long-run.  Some may be willing to wait as long as five years to get their money back, but by then they will expect two or three times their original investment.

Even if it’s not clear to you at the beginning, an angel will always be looking for an “exit strategy”, and it’s your job to provide one.  They may LOAN you the money, or they might BUY STOCK, but either way they want to know that the money will come back to them one day.  (We’ll discuss angel negotiations and loans another time.)

Do the Math: If you want to estimate, figure on keeping an angel’s money for 5 years at an interest rate of 30%.  During those five years, you may not have to make any payments, but at the end of the 5 years, the angel is due more than twice what you borrowed! (drop me a comment below and I’ll send you a simple spreadsheet to show their investment return).

The Bottom Line: Angel capital is flexible but expensive.  Be sure you get to know the person and their goals before taking their money.  Use their expertise to improve your business.  And be clear about what happens if you cannot repay them in the end!

STAY TUNED FOR NEXT TIME:  Negotiating with an Angel — tips and tools to make the process fair and smooth.

Dedicated to your profits!

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