investment, investors, angel-investors, fundraisingSo lately it seems that the popularity of having 10-20 investors in your early rounds has increased. It is pretty obvious from the risk and entry barrier point of view why this tactic is logical.
But how does this fundraising process work?
Does everyone contribute the same money? Do they all contribute equal mentoring? Who gets to be in the board? How complicated is the legal process? Do they all get to vote?
This could be a very broad question, so I’m going to interpret it narrowly enough to give a compact answer.
Business angels are people who want to make money by investing cash (and typically some other resources such as their time or social capital) in businesses. Many do so on top of one or more “day job” commitments.
So the opportunity for a business angel is about investing early. The challenge is that a single investor is likely to find it hard not to be drawn in more deeply than they may have intended. (Though startups are sometimes successful precisely because they have investors who, when the opportunity has clarified and the need is there, are willing and able to jump in to the business.) An investor is therefore likely to want a portfolio of businesses, as the risk is high in each individual venture, and to avoid too many situations where they are the sole investor.
Angel groups and networks typically exist to help investors get sight of more opportunities in a managed way, and to assist efficiencies in the initial appraisal and investment through to ongoing management. In such groups, and between angels apart from groups, you will often find that from the business’s point of view, a single lead investor acts for the group, and any discussion between investors may be invisible.
In that kind of situation, things are simple from the business’s point of view, but not transparent. And there are different ways of managing situations of material disagreement, even including “one out, all out” agreements where if any investor wants to bail, the group will follow suit.
A lot of startups have an ideal scenario in mind where each strategic need ahead is represented by an investor, and that all investors are going to work hard for success. That is not unknown, but it’s rare. More often - and not unhealthily - the fund-raising process for these many investor cases delivers cash under fairly simple and standard structures and agreements, along with strict supervision and limited support. The structures and agreements will typically make any differences between individual investment levels unimportant as they are acting in concert; individual networks may have rules, so when pitching it’s good to do some homework.
A cautionary note is that it’s very possible for businesses to engage in a lot of pitching with no success or useful feedback. If pitching takes place at a dinner or other social function, the time won’t have been wasted if nobody invests in anything. Raising money takes time, but I would encourage anyone focusing on angel groups to make sure they regularly seek - and listen to - independent feedback on their pitch.
Obviously, it varies in every case. But I will try to explain the general rule. I’ll also give you an example scenario. (This ended up being a lot longer than I had hoped…)
Typically, during the seeding round of investing, investors like to value each share at $1 (it just makes things easier). Remember, as the founder, you don’t have to pay $1 per share. You get to use par value which is often $0.001. Also, make sure you don’t take all the shares. You have to leave enough shares so that you can raise enough money.
So you company should issue enough shares so that you company is valued at whatever you think it should be. Then, each investor invests as much money as they want. Each share gives the investor one vote. So, each investor gets as many votes as they have shares. Then, all the shareholders vote on the board of directors.
The only time that a shareholder doesn’t get to vote is if they hold preferred stock; preferred stock gives them no vote, but they get first dibs on dividends and any leftover money should the company go under.
As for how much mentoring each investor does is completely personal to them. Some investors are great mentors, others just want their money.
As far as legal goes, it can vary like crazy! If you are a group of friends, then the legal probably doesn’t need to be too tight (unless you plan on suing your friends); notes scratched on pieces of paper that everyone signs are technically legally binding. If you are working with a lot of money, then it is probably worth investing in a lawyer who can help you with this (they will make sure there are no loop holes).
Example: You make a company, issue 100,000 shares, and take 50,001 for yourself. Investor A takes 24,999 shares for $24,999. Investor B takes 200 shares for $200. Investor C takes 24,800 shares for $24,800.
In this case, you get 50.001% of the vote, investor A gets 24.999%, investor B gets 0.2% and investor C gets 24,8%. This means, in the end you get the final say and your company now has $49,999 to do with as you see fit.
Note: even if you have control of the company, the investors can technically launch a legal battle in order to take control away from you, so you need to make sure you keep them happy.
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