You and your investor have made it through some tough decisions. You’ve shown the investor your valuable idea and she has decided to invest. You’ve set parameters and negotiated terms. Perhaps you have negotiated an active role for your angel investor in your business endeavor. Many times an angel investor chooses to invest in companies that are within their interests. If you are an artist, you may have found an angel who specifically invests in arts-based businesses. Many artists have fruitful ideas but lack the business acumen to develop their ideas. Therefore, offering your angel a role in your business can help ensure success, and even teach you a thing or two along the way.
Supporting the entrepreneur is part of the reason many angels choose to invest their money. In Winning Angels: The 7 Fundamentals of Early Stage Investing, authors Amis and Stevenson discuss the five participation roles an angel investor may take on in your business. These roles can evolve and change as the challenges of the business ebb and flow.
Silent Investor: Some angels choose to let the entrepreneur hold the reigns, taking “no active interest in the company, except to sign papers and hope for returns” (249). However, if an issue comes up in an area of expertise, the angel can change roles to accommodate and support their investment.
Reserve Force: A reserve force angel will use their relevant skills to support the entrepreneur when asked. Amis and Stevenson explain how one angel investor maintains a “hotline” that the entrepreneur can use to contact the angel during a difficulty. This kind of angel supports their investment by offering advice, counsel, and even training to the entrepreneur and his team.
Coach: Amis and Stevenson state that the supporting role of coach is “perhaps the highest impact investor who does not control the company” (250). This kind of support involves regular meetings, and offering advice, support and any assistance the entrepreneur will need to ensure success in the endeavor. Much as in sports, the coach does not play the game, he stays on the sidelines (250).
Controlling Investors: This role goes beyond support and becomes an active lead in the business, often usurping the power of the entrepreneur. This is a high-impact role that can often create tension in the relationship between the angel and entrepreneur if the terms are not hashed out ahead of time while structuring the deal.
Lead Investors: As with many things in life, the money takes control. If an angel has the bulk of the involved risk through capital, then he may be interested in holding the company reigns to ensure a return on their investment. Again, creating terms for this scenario in the deal structure can mitigate dissonance between the entrepreneur and angel investor. If the lead investor is doing his job well, then he is likely empowering the entrepreneurial team, taking the lead on future investments (specifically venture capital), and effectively creating value from the team’s effort by leveraging his knowledge and experience.
As you can see, support may come in a variety of forms. Many times an entrepreneur is not the best choice for ceo. He or she may need to learn new skills or relinquish control to earn a strong profit. For artists, this may be easier said than done, since the nature of an arts-based business relies on the creativity of an individual. Therefore, all the ego and experience, or lack thereof may impact the ability of the entrepreneur to accept support, especially a control or lead support. Accepting angel investments sets you up for dealing with these kinds of control issues, as well as the growing pains of creating a business. It is important to consider what kind of help you need when making a deal with an angel investor, and whether you would be comfortable stepping down as head of your business.