What startups should know about dealing with angel investors

It is common for an angel investor to invest in an early-stage startup especially as one of the first investors in a pre-seed or seed funding.

An angel is typically your “rich uncle” who is a high-net-worth individual who decides to take a chance on you after hearing your startup pitch. And he would usually invest in the company because of your relationship or even you can “can do” attitude or perhaps other non-commercial reasons that may attribute to his investment decision.

Generally speaking, they are usually two types of angels in Malaysia. The first is the working and career professionals (like doctors and lawyers who made money in their trade or profession. The second group is the entrepreneurs who made their wealth through blood and tears in the brick and mortar industries like construction and food and beverage.

Many of these angels nowadays know about startups and crazy valuation. They both have seen how other angels like them became millionaires by investing in technology companies. So they also want to get a piece of a future unicorn-like Grab too, so they are willing to take a chance on you.

‘Better the devil you know, than the angel you don’t’

Before taking money from an angel, please spend some time to do background checks on an angel. If you decide to take money from your rich uncle, please ask his staff, wife and kids, or even his friends and colleagues or anyone who can give you some ideas on how he works and behaves. People wear different social masks in various settings, so you need to know how he operates so that you know what you’re getting yourself into when you take his money.

Dealing with an angel, on the other hand, can be challenging or even confusing at times. I mean, you can never really know why he decided to invest in your company in the first place.

In my experience, dealing with venture capitals can be more straightforward. For instance, venture capitals have a clear financial motive in making money when they’ve decided to invest in your company.

Some angels even think that they ‘own your company’ when they’ve only invested some seed money. Some may start instructing and telling you what to do like switching your company secretary with their own without any justified reasons. And some angels may even tell everyone and call you up like as if you’re their employees. I mean, you don’t want to get a call at 11 pm asking to meet up to discuss your business plan because that’s the only time the rich uncle is free.

Be clear on the expectations

I’ve seen angels promising founders, the moon and the sky like offering to open doors to his network by introducing new large customers and investors friends. Make sure you get things in writing.

If the angel also agrees to become a startup adviser for your company, make sure you put this in writing separately in an advisor agreement or an advisor appointment letter. Put your expectations like how many hours you expect him to be around in the company and what meetings you want him to join. State clearly what kind of things you hope him to contribute like if he will connect you with new customers or connections put the names and preferably in quantifiable terms.

You also have to decide if the angel can carry out his promises if the money the angel has the capacity and resources. If you took up the angel’s money, and the angel fails to do what he promised to do, you may end up with a shareholder that fails to meet expectations. To put it bluntly, you took in some dumb money.

Get things in writing

Angels invest in a company because they trust the founder. I’ve also seen how angels invested in a company without signing any document. Some even just transferred the investment money right to your bank account.

It’s good to put things in writing so that you are clear on the terms of the angel’s investment.

Of course, the commercial terms may not be so complicated or onerous than getting money from an institutional investor or a funding agency. Having things in writing helps you record parties understanding to have the necessary paper trail for future fundraising round.

Do you really need the money?

Yes, I know you need money to grow your company and build tractions and all. But are you taking the money simply because the angel has offered you money? In other words, you shared your idea, and the angel simply decided to provide you with cash. There’s a big difference. Some angels I’ve dealt with offered too much money for a company. So you may end up in a scenario where the startup’s valuation ended up being too excessive and high in return for a small stake like 5-10%.

I mean, there’s no harm to take up the money. It’s your company, after all. Instead of taking up the whole investment amount offered, perhaps you may want to stagger the amount in several tranches. So instead of giving too much equity upfront for a single angel investor, you may want to manage the dilution for other funding rounds also.

On a side note, by default, entrepreneurs will also think selling their shares in the company or equity investment as the only way to raise funds. They are so many other ways to fundraise like pre-order sales like how Oxwhite did when they first started—or even bootstrapping until you become profitable or get a better offer. I mean, if your business is doing well, they’ll always be serious investors out there willing to invest in your company.

Bringing a new shareholder, especially an angel that offered you money so quickly into a company can be a ‘red flag’ too. It’s a big decision, so you want to think about this carefully.

Can’t find the article covering the topic that you’re currently finding for your startup? I’m always figuring out new topics to write about on this blog. Feel free to drop me a note using the contact form, so that I know what to write about next time.