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.