The angel put in $20,000 and guaranteed a line of credit of up to $75,000, using himself as the bank, according to Watts. He received a 35% stake in the company and was paid a consulting fee, although he didn't provide any additional services, Watts says. The interest on the credit line--2 1/ 2% over prime--sounded reasonable. But the angel also got 20% interest on every draw against the credit line. The entrepreneurs understood the terms, but what they didn't expect was that the company would grow so quickly. As it did, Watts habitually tapped the expensive line of credit to make payroll, tossing the company into a "death spiral." Eventually, the pair turned to employees and friends, who pitched in $30,000 to buy out the angel's equity stake. They then took out a loan of $225,000 to pay off the line of credit. "We were trying to expand; he wanted to make sure we weren't spending too much money. We needed to hire; his goal was to make a lot of money," says Watts. Looking back, he issues a single cautionary sentence: "Make sure you have common goals."
It's Up to You to Harness Your Angel's Special Powers
When Robert Rogers Jr. set out last fall to scare up money for Chesapeake Center Inc., the health-care service provider he cofounded in 1985, he interviewed a dozen venture capitalists and angels. His first angel had been an almost-retired entrepreneur who offered $370,000 and plenty of advice. For his second round of financing, he chose an angel who not only offered $3.5 million but also signed a written commitment to help Rogers meet specific milestones.
It's tricky placing restraints on someone who is offering to give you money. But Rogers's contract spells out exactly how and when the angel will help him with such tasks as negotiating bank loans, checking out candidates for acquisition, and recruiting senior managers.
It's incumbent upon entrepreneurs to institute a formal communication system, especially given the average angel's bulging portfolio. David Spitzman, an angel investor based in Newport, R.I., wants to receive financial statements on at least a quarterly basis, supplemented by a phone conversation every couple of months. He's most irritated, he says, when he suspects he's being placated. "Inconsistency makes me nervous," he says. Pearl Holforty, CEO of Liberty BIDCO Investment Corp., an investment firm based in Farmington Hills, Mich., goes a step further in making life easier for her angels: three times a year, she invites them to a get-together where they can mingle with representatives of a company she thinks might interest them.
Such care and feeding can pay off in unexpected ways, as Joe Boldan knows. Boldan, CEO of Ex Officio, a $12-million travel-apparel company in Seattle, came to a sobering awareness late on Christmas Eve of 1996: sales weren't picking up fast enough to enable him to make payroll. The call went out: chief financial officer Bob Carroll got on the horn with Varro Smith, an angel with whom the company had a long-standing relationship. Smith, confident that he was hearing the truth--he'd always been kept in the loop--wrote a check for $125,000 to cover the pay of Ex Officio's 30 employees.
That kind of 11th-hour rescue could come from only one type of investor. Distinctions may blur, but one fundamental difference remains: because they are investing someone else's money, venture capitalists aren't much equipped for decisive, much less heroic, measures. Angels, no matter how much they've evolved, are still free to act on their feelings. "It's a great company," says Smith. "They have integrity." That's about as far as he goes--or needs to go--in explaining his decision to bail Ex Officio out. "He understood what we were going through, and he agreed to do it on the spot," says Boldan. "That's a real angel."
Stephanie Gruner is a staff writer at Inc.
SPECIAL REPORT: HOW TO FINANCE ANYTHING
