Welcome back Blog readers! Amis’s and Stevenson’s (2001) information, regarding angel investing, in their book Winning angels: The seven fundamentals of early-stage investing will be part of my Blog post again as we learn valuable insights together. I will be sharing information in this Blog from Amis and Stevenson (2001) about Structuring.
Koss (2007) states, “Structuring the deal is a key aspect of completing an angel round of financing. It is critical to ensuring that management, employees, past investors, current investors and future investors are all satisfied with the company under its new capital structure. As a result, negotiating and structuring the deal can be the most complex aspects of angel investing” (p. 1).
Lets explore some details about structuring…
What options exist?
Here are a few options:
Three common ways to structure angel investments include: common stock, preferred convertible with various terms, and convertible note with various terms.
According to Amis and Stevenson (2001) the common stock structure “…is the ‘complete faith’ option, which is used most often by family, friends, and fools as well as winning angels who rely more on the integrity of the entrepreneur as well as their own ability to source or evaluate” (p. 190). Some angel investors, especially those that have lost money on common stock structure deals, refuse to have any part of common stock structures and there again some angel investors will (Amis & Stevenson, 2001). Amis and Steven (2001) note that with the common stock structure, in the best case scenario, an angel investor can make a substantial amount of money without having to invest their time and involvement or in the worst case lose their entire investment. Amis and Stevenson (2001) note that a preferred convertible with various terms structure is most common. Amis and Stevenson (2001) states, “The preferred share structure offers considerably more protection to the investor and this is why…many angels come around to using it” (p. 192). Lastly, regarding the convertible note with various terms structure, Amis and Stevenson (2001) state, “The convertible note is becoming a more common vehicle as financings are occurring in shorter time frames” (p. 193). These are certainly some structuring options. Amis and Stevenson (2001) give some final thoughts on structuring which include: keeping things as simple as possible and making sure that you understand these three structure types.
Finally, to finish up this Blog post on structuring, it is important to note that Koss (2007) gives several examples of “warning bells” or “red flags” regarding structuring deals. Koss (2007) states, “There are some red flags that investors should watch out for. Are there any unknown investors? Is the term sheet too complicated or inappropriate for the nature, context and stage of the company? Is the company raising enough money? What’s the possibility of dilution (p. 9)?” I highly recommend reading through the entire list of “warning bells” and “red flags.”
To read the entire article by Koss (2007) please click the following link:
Thanks for reading and good luck on finding investors and structuring deals for your new venture!
Amis, D., & Stevenson, H. H. (2001). Winning angels: The seven fundamentals of early-stage investing. London: Financial Times Prentice Hall.
Koss, A. (2007, July). Best Practice Guidance for Angel Groups – Deal Structure and Negotiation. Retrieved May 22, 2019, from https://www.angelcapitalassociation.org/data/Documents/Resources/AngelCapitalEducation/ACEF_BEST_PRACTICES_Deal_Structuring.pdf