The first question to ask is:
How much Equity are you offering in exchange for Angel Investment?
Many entrepreneurs have an emotional attachment to their business or concept and tend to overvalue the business while at the same time refusing to give up any control. So how much equity are you offering an Angel Investor in exchange for his or her investment?
If you are prepared to offer an Angel Investor 1-20% equity in the form of common shares then, this is a part of your investment proposal that requires more thought. However if you are prepared to offer an investor 21-49% equity in the form of common shares than this is the ideal range for most Angel Investors depending on the risks. 50%+ will always be an extremely attractive range for most Angel Investors depending on the risks.
You should consider how you arrived at this percentage. There are a number of variables that assist in determining the appropriate % to offer an Angel Investor.
Answer the following questions as honestly and completely as you can to get a better sense of what the reasonable amount is.
- How important is the funding to your company?
- What percentage of the total company value does the Angel Investor’s funding represent?
- How has the company been valued?
- What additional value does this Angel Investor bring?
If you are unwilling to give up any control or to even share control with an Angel Investor, you are severely reducing your potential investment pool. Most Angel Investors want to assume a role in the business ranging from active management, mentoring, leveraging contacts etc. Others may want a more passive role typically referred to as a “silent partner”.
It is very important to note two things:
- Angel Investors typically invest in companies which fall within their area of industry expertise or significant experience.
- Angel Investors can be a valuable resource for the entrepreneur that extends well beyond just providing financing.
Angel Investors can lend their expertise through mentoring, coaching, monitoring performance, generating leads, opening doors etc. and they have a vested interest in your success. Don’t be too quick to dismiss this since most Angel Investors have experienced greater results when they have taken a more active role in the new company.
Even if an Angel investor is not interested in directly participating, they may know of someone else who would be a valuable asset to the management team.
It’s very important that the entrepreneur detach themselves from the emotional connection to the business and think in terms of what’s best for the business. Try to look at the additional value that a potential Angel Investor brings other than the obvious – financing.
- How much is my company worth today?
- What is the potential of the company?
- How much do I give up to attract “smart” funding?
- How much could it be worth?
A start-up is much more difficult to value, as the valuation process is based on projections. This takes into account such things as current market conditions, interest rate levels, projected milestones, competition, management team etc.