I will begin this blog with a disclaimer: I am not a very good chess player.
Ah, chess, the intellectual’s favorite pastime, full of rigid rules, strategy, and forward thinking. Structure is so important, each piece moving within it’s boundaries, all of them intending to do their part in securing the king’s position. Each player has their own agenda, moving round after round with forethought and precision. The culmination, the dull knock as the king falls and the opponent evenly states, “check mate.”
I cannot offer sound advice for structuring a deal with an angel investor. However, I can allude to the idea that, just as in chess, creating a strong line of defense from both sides will yield a valiant game. Not to mention, as in the gentleman’s game, playing by the rules with sportsman-like conduct is imperative.
As an entrepreneur seeking funding, you have the leeway to create the rules of the game through the structure of the deal. The most important thing you can do to ensure strong and stable rules for your endeavor is to educate yourself in the essential terms regarding how such deals are structured. Understanding what you require from your investor and what your investor wants from you in return is the first step in creating a well-played deal. The first rules you create are the basis for future rounds of funding. Creating your deal structure in the angel round with forethought and strategy will enable future investment opportunities to move more smoothly.
The disappointment of failure, (check mate), can affect more than your ego. Angel rounds tend to be full of emotional connections both with your idea and your investors, who may know you personally. And we need not tarry on the thought of loosing a substantial amount of money, along with your reputation, should the business fail. Unless you are fully versed in creating a deal’s structure, both the language and the impact of the terms, it would behoove you to seek out an attorney to help you visualize and understand the demands placed upon you and your investor. In Winning Angels: The 7 Fundamentals of Early Stage Investing, the authors recommend writing up a ‘one-pager that describes the main elements of the deal between the entrepreneur and the investor” (207). This single page should include capital structure, involvement of the investor, expected time the entrepreneur will stay in the business, salary and benefits, reporting mechanism, and any other specifications required between the two parties. This one-pager can then be taken to an attorney to structure the language and make sure the rules will creating a winnning game for the new team.
Many of the rules you put in place in this angel deal will affect how your business moves and operates in the future. Taking the time to strategically plan how you will utilize an angel investment, making sure you and the investor are a good match, and understanding the language and structure in the deal will set the stage for a strong investement for both parties. Each of you will have your own agenda in the deal, and therefore, it is vitally important to your business that you understand the rules of the game.
8 thoughts on “Angels Investors and Artists: Structuring”
Developing these ideas to help us understand through discussing a game must of us know how to play with an idea that most of us don’t completely know how to interpret. I loved the analogies and just reading this article in general helped me gain a better grasp of how structuring is critical to the components of investing. The more I find myself reading about investments, the more I want to invest. With that being said, I know there are limitations to the amount that I should be investing and with that, the types of companies I would want to be investing in. On top of all of that, the structuring of the investments after the first two trains of thought are figured out is the next key to the puzzle piece, or chess move, that must be determined.
Nice job I enjoy your writing style it reads so much better than the text book! Structuring is fairly complicated. However, it is a great time to take a pause and make detailed order out of your project and business. It forces you to explain to yourself and any investor the outline and structure of your company. Doing this can help eliminate confusion about what is expected of you. This small task can make an investor feel more comfortable and so is a very valuable step in the investing process. Once the agreement structure is finalized the dream is that everyone will be working to their fullest potential and fulfill the agreed terms. Sometimes things happen and one or the other defaults on the terms. When this happens, it is important that the two parties open the lines of communication. I like d your comparison to a chess game. All negotiations flow a lot like this game mixed with a bit of poker. I am not the best at negotiating. I always give in. No doubt something I would have to work on if I ever look for an investor.
Your analogy to chess is a great way for readers to understand that structuring a deal will be strategic and at times can be a slow moving process. Even if someone is not the best chess player, after reading this post it is understood that each part of the deal, or move if you will, should be with purpose. Highlighting that egos and relationships can potentially hinder a deal is an important reminder to structure guidelines and boundaries for ourselves as we do for investors. Making a non-bias decision or boundaries can be difficult, so we should build-in ways to combat emotional decisions. One way to do so as you mentioned is to have a lawyer or a SME look at the one pager agreement created. A party not affiliated with the deal hopefully will be able to balance and sound advice. Great post Joy!
Excellent job on your post. I have dreams and ideas that I’ve always considered, and this really helps to evaluate them.
I love the analogy with structuring the deal and the game of chess. I also think the one-pager is a great way for both sides- to learn more about the goals and objective of the other player; however, in chess the name of the game is to never give anything away. A structuring strategy that includes open communication and honesty between the founder and investor can only help move the “game” in a positive direction so hopefully there is no check mate in the end. Great post! Jill
I agree with Beth! Your writing is so much better than the book. By the way I love chess, do not play as much as I would like though. I really enjoyed your metaphor, you are just always so creative. I agree on your many points. Like chess whether just doing business or looking to invest, it is important to go in strategically and with a plan, we must play several moves ahead (have a plan), and it is so so very necessary to understand the rules of the game. Fundamentals of angel investing and the fundamentals of chess sound like they have a lot in common, very strategic games indeed. Great work again!
When I think of structuring I think of control and in order. You really focused on helping understand structuring.Great job!
The analogy of your post is very intriguing and much easier to follow than that of the book. I like the idea of using a chess game as your way of explaining structure and the importance that it holds. Generating a strategic plan and “wowing” investors sounds so simple, yet can become so complicated. Start up businesses must assess the nature in which their daily operations will be run, along with compare themselves to any potential competitors. Investors want to know what sets you apart from the rest and how they will benefit from creating a deal with you. Having a plan that is structurally sound will be very beneficial to any start up company. Great post!