As eager as you may be to get your venture funded, some capital should just be avoided.
1. Angels Swimming in the Shark Tank
While most Angel investors realize that there’s plenty of room for both the entrepreneur and the Angel to make plenty of money on a good deal, some investors use their position to take advantage of an entrepreneur’s lack of financial resources or deal-making experience, or both. If the term sheet just seems too tortuous and outright unfair, it’s likely time to respectfully decline. Plus, if your pitch really is that good, there is plenty of other money on the market.
2. Lawyer Angels
While all Angels want to make sure that their investment is legally sound, avoid investors that threaten you with lawsuits at every chance they get. Similar to the overbearing shark tank angels, don’t fall into the trap of getting bullied simply because your investor has a stronger financial position than you.
3. Shrewd Angels
Like the big banks that thought they were too big to fail, some successful business people turned Angel investors think they are too smart to fail. They use their ‘superior intellect’ to influence your decision making despite whether it truly is what’s best for the startup. You should be prepared to openly accept coaching from your Angel investors, but you too have your area of expertise. This is your startup and you need to stand behind your decision making, for better or worse.
4. Angel Brokers
Many brokers position themselves as Angels but actually have no intention of investing their own money. Some actually go so far to convince you to pay them to introduce you to real investors. Again, if you are presenting a good business and investment opportunity, there is plenty of money out there that won’t cost you a dime (other than an equity position of course).
5. Control Freaks
Angel investors can be control freaks for several reasons. For some, it’s one of their first investments and they are keeping a tight rein. For others, they setup your contract so that when you hit your first road bump there are clauses that give him more control and require him to step in and run your company. Similar to lawyer angels, don’t sign a bad contract for easy money. If you find yourself in one of these situations, it may be up to your Board and only your Board who can save your right to control the company.
6. Senseless Angels
Despite some level of business success, understand that wealth does not equate to good business skills. You should be prepared to be asked the tough questions by Angels. If they are not asking the tough questions, focus on the superficial aspects of the business, or sign on board too soon to be true, then this capital could end up seriously harming your startup.
7. Has-Been Angels
The has been Angel usually comes with a fair amount of former success in his/her career, likely in the dot-com era. They ask all the right questions – sometimes too many of them – but either have a major liquidity problem or downright don’t have the capital to invest. These are a waste of your time.
The moral of the story is simple, be sure to vet your Angel as much as they are vetting you. Capital should come for one cost: equity. But not a headache, loss of control in your startup, or bad decision making.
Want To Learn More?
Download our free Raising Capital from Angel Investors eBook.
This guide will walk you through the process of obtaining seed capital for your startup. This book includes:
- An overview of the angel investor process and who they are
- The milestones angel investors look for when evaluating your business
- Strategies for finding the angels best fit for your startup
- How to nurture the relationship, prepare for the meeting and deliver the pitch
- Rounding out the details and preparing for the future