Remember, what potential investors are really evaluating at this point is the people behind the company, not the validity of the company itself. Potential investors can do the market analysis on their own or hire someone else -- a market researcher or consultant -- to do it for them.
Second, show that you either have sales or can get them. The longer it will take you to get your product into the marketplace, the longer it will be until the angels get their money back. All things being equal, angels would rather cash out sooner than later.
Third, be sure the deal you're proposing makes sense. In other words, propose the deal from the investors' point of view. Tell angels what's in it for them. Think through what the investors need to get out of the deal in terms of ownership and potential returns. Don't aim to simply squeeze every last nickel out of them.
Fourth, head for the exit. When do you expect to sell your company or go public? Angel investors will want to know when they're going to get their money back.
Fifth, have the necessary documents at hand. The Boy Scouts have it right: be prepared. Bring everything potential investors might want in the way of backup: your business plan, financials, corporate bios, and more.
Finally, respect the angels' time. Be punctual. Ask how much time the angels have for the meeting. Keep your answers short and to the point. If you don't know the answer to a question, don't fake it. Say you will find out within in a certain time period.
STEP 3: Valuation, or How Much Is It Worth?
Valuation is all about putting a monetary value on your com- pany and on any investment an angel might make in it. How much is your company worth? How much money are you trying to raise? And what amount of ownership -- in stock or other securities -- are you willing to give up?
Angels price your company based on its potential capital return in the future. The share of the potential gain they ought to get in return for their investment depends not only on the amount of money they contribute but also on their time, reputation, contacts, and opportunity costs (that is, money they might be making doing something else). By the same token, your company's future returns to the angels are not just financial. Your angels could also enjoy such intangibles as the excitement of launching a start-up, a sense of contributing, and an opportunity to give something back to the entrepreneurial world.
Most commonly, angels value a company at a lower price than the entrepreneur would. For example, let's say you have a young company that's presently little more than an idea and a team. From the angel investors' point of view, ideas are cheap. It's the execution that adds value. And potential investors haven't a clue, at this stage of your company's life, whether you and your team will be able to execute.
While every deal is different, here is a valuation model that was created by Dave Berkus, a full-time angel and founder of Berkus Technology Ventures LLC, in Los Angeles. (See box, below.) Just remember that "quality" can be defined differently in different deals.
What's your fledgling company worth?
|
| IF YOU HAVE THIS |
ADD THIS TO YOUR
COMPANY'S VALUE |
| Sound idea |
$1 million |
| Prototype |
$1 million |
| Quality management team |
$1 million to $2 million |
| Quality board |
$1 million |
| Product rollout or sales |
$1 million |
| Total potential value: $1 million to $6 million |
So now you know how angels are likely to value the deal. Price your company accordingly. Of course, you can always ask for more. The risk? You won't be taken seriously.
STEP 4: Structuring, or Keep It (Sort of) Simple
When angels ask, "How are you structuring the deal?" they're in effect asking two separate questions:
One, on what terms will the angels invest? In other words, what type of financing will the angels provide: equity or debt? What kind of equity? Will the investors get their cash back before the entrepreneur does? Will the angels have the right to invest in future rounds?
Two, what role will angels play in your company going for- ward? Will they be silent investors, active ones, or something in between?
You'll also need to think about the three fundamental ways angels are likely to share in your company: common stock, preferred convertible with various terms, and convertible note with various terms. Each has its pros and cons, and each has its angel fans and foes. Common stock is the simplest but provides few safeguards to the investor. Preferred convertible is more complicated but can benefit the investor to a greater degree. Convertible note allows no negotiation on price but offers angels the most protection.
Your angels' involvement in your business can be tricky. Once angels invest, their role in your company may be anything from passive shareholder to board member. It's all negotiable, and the time to negotiate is before the term sheet gets signed. Unless everyone knows how the relationship is going to work up front, the potential for problems is limitless.
