And how to avoid dodgy deals on the way in
THE horror stories about angel investors are true,” warns Andrew Scott, a serial entrepreneur and investor. “I’ve been stung a few times. Once I was working out a contract with an investor and it was taking far longer than expected. Then at the eleventh hour, he turned round and insisted on double the exit. He demanded an instant response or he would speak to the administrators.” Scott thinks he was trying to wind up the company to take its intellectual property.
And the trouble doesn’t end there. Giles Hawkins, a lawyer at Orrick, says that angel funding networks that charge a pitching fee for access to investors are pretty common. “It’s frowned upon, but that doesn’t seem to stop it happening.”
“You have to do your due diligence on investors,” Scott warns. “They are certainly going to do it on you and use the information to cut themselves a good deal.” Hawkins suggests that you speak to the angel’s other investments to ask what experience they have had. “Entrepreneurs should also ask their accountant and other people in the industry to see if anyone has heard of them.”
These fallen angels can also catch you out in the contract if you’re not careful. Savvy business owners need good legal advice. “There aren’t many lawyers that are experienced in small scale business investment in the UK. Only a few can say what’s a good deal and what’s not, let alone negotiate out the negative clauses,” says Scott.
Alex Hoye of ICE Investments suggests that entrepreneurs get their hands on template contracts through organisations such as Seedsummit (www.seedsummit.org). “Seeing the templates in advance ensures that entrepreneurs can see what the typical terms are.” Of course, business owners do need to try to see the deal from the investor’s point of view too, he insists. Start-ups are very high risk and investors would not offer their cash if they couldn’t make a healthy return. Hoye also recommends that entrepreneurs join a network. “You need to be able consult trusted friends every step of the way.”
Dodgy angels prey on the inexperienced and naive. You need to be prepared for this, says Scott. “You mustn’t get spooked. Make sure you do all your boring paperwork, so you can call on any number or information an investor wants.” You don’t have to have all the answers though. Scott says: “Don’t be frightened to tell an angel that you will need to think about certain issues, consult your co-founder or board. In the long run, they’ll have more respect for you if you do.”
“The key,” Hoye concludes, “is to find someone more interested in getting a return from you growing your business than striking the deal in their favour.”
HELL’S ANGELS | THE TYPES
Predator angels: This sort prey on naivety, striking deals that take more than their fair share of a business on exit.
Litigious angels: Legal eagles, these guys will use any excuse to take you to court to take over your company.
Time-wasting angels: Angels that leave you hanging around until you’re out of cash and desperate enough to take whatever terms they offer.
Broker angels: These guys aren’t really angels, they just want to take fees for introductions.
“Gotcha” angels: This sort put clauses in the contract that allow them to step in and take over your company at the first sign of trouble.
Rich-but-dumb angels: Wealth is not synonymous with intelligence. Make sure they really understand your business. .
Know-it-all angels: Investors that were successful businessmen who think they are always right.
Mummy angel: These guys want to involved in everything you do. Investors that act as mentors are very helpful, those that micromanage you are not.