Editor’s Note: This post was originally published on Seattle 2.0, and imported to GeekWire as part of our acquisition of Seattle 2.0 and its archival content. For more background, see this post.
By Rebecca Lovell
For those of you who skip to the last page before committing to a novel, or got through high school on Cliff’s notes, you might enjoy some quick and dirty tips on positioning a business for angel investment. Not wishing to practice law without a license (insert legalese-laden disclaimer here), read on for some pitfalls to avoid. The below could get you on angel investors’ bad side:
LLC- this structure can be appealing as a pass-through for tax purposes, and if you’re lucky enough to create a profitable cash-cow, there is a subset of investors out there who won’t be mad at you for cutting dividend checks. However, by and large, professional investors (starting with angels and certainly including VCs) get into this business looking for a positive liquidity event. C-Corp is the only way to fly; it is the only entity able to offer shares publicly, and the only corporate form that allows multiple classes of stock. Speaking of which….
Common stock— another no-no. Preferred stock is the industry standard for accredited investors who get in early and assume significant risk. Check out this explanation of the vehicle, and an ever-lucid post by one of my personal favorites, Brad Feld. Everyone knows valuations are plummeting and terms may a bit more stringent for entrepreneurs– but I don’t want to set off any undue alarms, and haven’t talked to anyone anticipating a return to the bad old days of triple-dipping full-ratchet why-would-I-ever want-to-found-a-company kind of term sheets.
Goofy (yes, that’s a technical term) corporate structure. Every month, we interview former-consultants turned entrepreneurs, who realize after the 100th client request, they have developed a product that could universally solve their clients’ problem. Steeped in domain expertise and market validation, new solutions are born. Sheer brilliance, and a great foundation for a business. But if this new solution is folded into an existing services business, it might not spell angel investment opportunity. Investors rightly want to know– exactly what am I buying? You might consider spinning off this new idea into its own entity. Grant angel investors a slightly bigger piece of a more compelling (and simpler) pie, along with a corporate structure that’s clean, and a scaleable business model that’s driven by technology.
Married-couple management teams. When asked if he ever invested in businesses run by a husband-wife duo, one of my favorite corporate attorneys and angel investors responded: “Let me put it this way, I’ve had three very successful marriages.” So the answer for lots of angels out there is–in a word–no. You may have a beautiful marriage and partnership that translates well into a successful business venture, but often the fate of a business and the fate of a marriage are linked. If you’ve seen the national divorce rate you may not blame my colleague for his response. Plenty of exceptions prove this rule (props to Sam and Johnny).
This just in: If you are out there raising angel money, for the love Kris Kringle don’t publish your funding terms in a public place…like, say, your website, or a standing-room only forum. Announcing the details of what otherwise should have been a private placement makes it a de facto public offering in the eyes of the SEC. And you definitely want to stay on their nice list.
PS: In addition to the C-corp and the hanging curve ball, the author believes in opening your presents Christmas morning rather than Christmas Eve.
