The Danger with Angels: Investors Who Want Too Much

In fact, I’ve seen company founders kicked out of their own company by angle investors. Anything can happen.

Like Getting Married

When you’re hunting for an angel, they all seem so, well, angelic.  Don’t be fooled; living with an angel investor can be a devilish problem.

In the best case, an investor will expect regular reports from you.  In the worst case, they not only want to direct the strategy of your company but also to be your boss.

Don’t let them.

Make it clear up front what you expect from each other.  Put it in writing if you can. And stick to it, because giving in can be a slippery slope.

I’ve personally met entrepreneurs who have walked away from their business rather than deal with the quirky personalities and demands of an angel investor.  And those that stayed in a bad situation have often paid for it with their jobs.

The only sure defense is to hold onto a majority share of your company’s stock.  Once investors — even multiple investors — get control of more than half, one angry (or impatient) angel can call for a vote that put you out on the street.

It’s Payback Time!

Lest you forget: Angel Investors want to make money — not just invest it!  Their capital is not free and they 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.

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 he gave you! (Drop me a comment below and I’ll send you a simple spreadsheet to show their investment return).

It’s best to understand those expectations up front and to know what the consequences are if you cannot provide an exit.

The Bottom Line

Angel Investment is flexible but expensive.  Be sure you get to know the person and their goals before taking their money.  Maintain a majority share of your stock if at all possible.  And be clear about what happens if you cannot repay them in the end!

Dedicated to your (angel-funded) profits,

David

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