Non-Disclosure Agreement: After your initial meeting with the angel, if everything is going well, you should invite the angel to your office to see the company for themselves. It gives them an opportunity to see firsthand your employees and company culture. However, as the angel is now on your company territory, be sure to protect your company by having the angel sign a non-disclosure agreement (NDA). By having the angel agree to and sign an NDA, you demonstrate your concern for protecting the company as well as putting yourself in a position to safely share sensitive information with the angel.
Due Diligence: Once an angel decides they are serious about moving forward with you and your company as an investment, they will begin a due diligence process. This requires your compliance in providing the angel with any documents they wish to review, as well as provide information about any contacts and references they want to talk to. Every angel conducts due diligence differently, but their goal is to get a more objective assessment of you and your company. They understand that you have put forward your best so far in order to wow them, and now they want to know what your worst is too. They will want to find out what potential challenges you face in the future. It is important to be open and honest with the angel during this process. The angel was most likely once an entrepreneur his or herself, so he or she will understand you may have incomplete information and that not everything is perfect. However, angels must protect their investment money by making sure they really understand the circumstances of their investment. Although not comprehensive, the following documents should be ready for the angel investor once they begin their due diligence process:
- Information about subsidiaries, joint ventures, and partnerships
- Minutes of stockholder meetings, board meetings, and committees
- Charter documents such as articles of incorporation and bylaws
- Financial information
- Lists of stockholders and information about their issued shares
- Information about all company employees and company management structure
- Information about any past or pending litigation
- Information proving compliance with relevant laws and regulations
- Information about any intellectual property rights
Term Sheet: A term sheet outlines the details of the investment you and the angel agree on. Some of the things you should include on a term sheet are:
- Type of financing: debt or equity
- If debt, will it be convertible? Secured or unsecured?
- If equity, will the stock be common or preferred?
- Amount of financing
- Will the angel be active or passive after the investment has been made?
- What happens if the company faces a liquidity event during the course of the investment?
Negotiation Strategies: When it comes to the part of the deal with your angel investor where a valuation must be determined, make sure you are prepared. The valuation will likely fall below what you consider to be the value of your company, but there are many factors that contribute to an objective valuation. A valuation can assess your company’s liquidity, cash flow, and the value of similar companies. You must also consider the value of the angel themselves, especially if they are well-connected in the investment world, have a lot of experience and advice, and if they provide an opportunity for follow-up funding.
Preparing For The Future
Follow Up: In order to maintain a good relationship with the angels you meet throughout the process of seeking angel financing, make sure to keep in touch with them after your conversations. For anyone who you have a meeting with, send them a handwritten thank you card. If they end up not funding you, you can keep them posted on your company’s progress. You never know, they may change their mind and provide you with funding in the future! For an angel who does invest in your company, keep them updated on everything about your progress, for the better or the worse. Share your successes and milestones with them, but be honest about problems you are struggling with. They might be able to help you get through the rut. Be sure to thank your angel frequently for supporting your company and making your passion possible.