Do angel investors usually get a board seat?
At what point do I need to give up a board seat? Or can I just grant an investor board observer rights?
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Jan 7, 2013
VC's will alm ost always ask to have a seat on the board. Not only that they will expect strict accountability and will tend to micromanage the business operating under a magnifiying glass) ,issuing benchmarks and milestones. You will be expected to be fully accountable to the board and the investors. they obviously besides a good plan look for excellent management.
Jan 7, 2013
It really depends on the investor and the type of company it is. Many angel investors want a seat on the board in order to have some input/control over what happens and for them, it is a good idea since they are providing the money for the business to operate. However, I have had some passive angel investors I've worked with that like to come in with money and stay out of the businesses way if the people in place are competent or be added in some limited capacity.
Essentially it depends on what the investor wants to do and what the business is willing to do.
Jan 4, 2013
look for strategic angels, as well as hands on angels, you dont want people on the board, who have no idea, or any experience in your business, or type of business
Jan 4, 2013
it all depends on how much they are investing but normally its a good idea anyway
Jan 3, 2013
It really depends on the size of the round, stage of business and the nature of the investors. I have seen small seed rounds without a board seat, but once you get into larger rounds (the amount really depends on industry), board seats are a more common part of the deal. And it also depends on the nature of the investors, venture capitalists and larger angel groups (which are more like venture capitalists in many ways) often don't take board seats in small seed deals (typically $500,000 or less, but can be more). These folks are getting their foot in the door and it is such a small investment to them that they cannot spend their time of such a small deal. However, for many smaller angel investors, these seed deals are a lot of money and they may push for a board seat. Dave brings up a great point on control. I would not give up control early on. I myself have never seen the 5:3 ratio Ellen brings up. For all the deals I've worked on (which is mostly in the venture space), the founders typically maintain control in the first round of funding when a board seat is requested (often 1 member appointed by common (usually founders), 1 member the CEO and 1 member the investor). Best of luck.
Jan 2, 2013
Typically the answer is NO. Only those that are inexperienced on both sides.
They get a board seat only if you allow it. You may want to add them to your board of advisors, though I wouldn't give them voting priveleges.
Jan 2, 2013
Yes. The ratio is 5:3. Five of their guys to 3 of yours on the board. If you have an attorney on your board, Angels dismiss them promptly. Also you MUST have an exit strategy in place or the Angels will write one for you. Also, have your employment contract in place or you will be dismissed post-haste once the checks are cut.
Hope this helps.
Jan 2, 2013
This is absolutely absurd. Doing this loses all control for you the founder.
Jan 2, 2013
Agreed, Dave. New York Angels use this formula as their guiding rule of thumb. I continuously caution new business owners to think through Angel Investment and Venture Capital carefully. In the startup phase this not the path to take even in health technologies and sciences. I am a big advocate for lean market testing first, proof of concept, generate modest revenue.and grow from that point.
Jan 7, 2013
Excellent point Ellen. Investors want to make a return on their investment and even more importantly, to get their principal back; Angels included. They want a finite timeline for this. They want to know there is an exit plan (new round of funding to buy their positions out or sale of the business or liquidation. It doesn't matter to them.)
Jan 2, 2013
In our case, the investor was a "silent investor". No decision making or board seats, just investing and getting a profit share. It will all depend on the individual and their preferences and personal goals.
Jan 2, 2013
This is the typical scenario for those that are experienced on each sid of the coin.
Jan 2, 2013
return was 30%, a set profit goal was determined in a given timeline. It was more of a contract than "investment". I'm sorry that I cannot share too many details due to confidentiality agreements.
Jan 2, 2013
Typically the answer is yes. It really depends on the source of capital, their interest in your company, and their motivation for investing in general. But in most cases Angels and VCs are going to want to be actively engaged in the management and development of the business they are investing in.
Observer rights may come into play if you find an investor who wishes to remain passive, however, this is usually not the case with less proven or very early stage companies.
Early stage investors assume a great deal of risk. Input and/or control are essentially risk mitigators. You as the entrepreneur can protect yourself to some extent by appropriately negotiating your agreements with investors and carefully crafting the language therein. But in the end, gaining access to capital often requires founders to relinquish some measure of control (just be careful about how much you are giving up and to whom).
If you have more specific questions or concerns, please feel free to contact me.
*Another item to keep in mind, is that the leverage differential between the capital seeker and the capital source can change based on the capital climate at the time of the investment. When capital is scarce or the economy is in a "risk-off" cycle, the investor will have more inherent leverage in terms of what it can squeeze out of the deal. However the converse is true when the money is flowing, business is booming, and investor sentiment is in the "don't miss out" mindset.
*Please note that you shouldn't confuse seed investors with Angel investors.
Seed investors are usually the 3 -F's "Friends, Family, and Fools." Angel investors are essentially venture capitalists who get involved with companies much earlier in their development cycle. Angels themselves are usually involved with fewer enterprises at a given time than a traditional venture capitalist and tend to get more involved with the day to day. That dynamic might change, however, if you're dealing with an Angel Fund.
At the end of the day, in the early stages, investors are usually investing in the managment team. As such the quality of the management team and their relationship with the investor is key.
In 2011 at NYU Stern, by invitation to private equity, angels and venture capitalists, Basel Peters, Vancouver, BC [www.basilpeters.com] and Bill Payne [www.billpayne.com] spoke indepth on the sale of his company Solid State Dielectrics, Inc. to E.I. Dupont in 1982. Speaking from the 5:3 ratio experience Bill shared sage advice for entrpreneurs/startups. Basil, fund manager, Fundamental Techologies II supported Bill's experience adding how to think about exit strategies and funding. Hope this helps.