Positioning Your Startup to Appeal to Angel Investors
After initial seed money and the money from friends and family has been exhausted, early stage startups enter a challenging phase in the financial life of the company. For biotech startups in particular, this can be the beginning of a relentless feedback loop: data is needed to get more money, but money is needed to get more data. One source of additional investment money to keep the data flowing is a particular type of early-stage investor known as an angel. Angel investors can provide much-needed capital to keep a startup running until it reaches the next stage, so positioning your startup to appeal to angel investors becomes an important activity.
While the process of searching for angel investors is important for startups to understand, this article will focus instead on an equally important and sometimes overlooked aspect of attracting investment dollars from angels: internal preparations that show angels that the startup is ready for their money. Startup members naturally tend to have a good understanding of the business basics that need to be communicated to investors, including questions about management, products, finances, market strategy, the intellectual property assets, and exit strategy. While these are prerequisites that angel investors want to know about a business before committing valuable capital, there are additional factors an angel investor considers.
After getting past these fundamentals, angels will look for signs that the startup is actually prepared to receive an external investment and whether the angel’s expectations in terms of ownership and control can be met. Startups that understand which internal factors matter in this regard are able to make the business more attractive to potential angels and are much better positioned to convince angels to commit. Angels have often made similar investments in the past and will engage trained professionals to conduct a thorough due diligence investigation of the company. Consequently, a proactive examination of the items an angel is likely to investigate will help prevent an otherwise interested angel from being scared away from the company because of unidentified or unaddressed issues.
There are many matters a startup needs to consider before feeling confident that the necessary items are polished and ready for the careful scrutiny of an angel. A diligent angel will inquire about the chosen business form. To an angel investor, it makes a difference whether the company is a C-corp., S-corp., LLC, or LP. The angel will determine whether the structure allows for a liquidity event or return on investment. The angel will also question whether the corporate structure is overly or needlessly complicated given the underlying business purposes.
An interested angel will also care about how many existing shareholders there are to determine if they are too numerous, given the angel’s goals and the future direction of the business. The share allocation among the founders is also relevant. The allocation offers a great clue into whether each founder has a large enough stake to be properly incentivized to strive for the ultimate success of the company.
Additionally, the angel will want to be satisfied that the necessary and appropriate legal formalities of the company have been executed, given the company’s corporate form. The company should have and maintain a legal share register. The company also needs to be able to show appropriate documentation of the board meetings held to approve the share register and the capital structure of the corporation. Involving a qualified attorney early on can help to ensure that these and other important matters are in order so that potential angel investors feel confident about investing in the business.
For a consultation regarding your individual business issues, please contact San Diego Corporate Law today!