Top 10 Reasons Angel Investors Should Say NO to Funding a Start-up
If you want to become an Angel Investor because you’ve watched the Shark Tank show or heard that some people made it big financially by investing in early startups, then let me share with you much of what you need to do and what you must watch out for to decide if this kind of investing matches your personality:
- 1. You must really get to know the start-up team of entrepreneurs (Quite often, the developers or inventors are not as good at running a business or keeping a team of people motivated and focused around them so they have the hardest time keeping staff in each phase of their growth making momentum near impossible.
- 2. You must perform an enormous amount of due diligence on the product itself and the market pricing and positioning.
- 3. You must work with an experienced consultant and an attorney who specializes in the field of angel investing to draft the right agreement based on:
- Debt or equity investment
- a. The returns
- b. The way the business will be carried out
- c. The on-going updates
- d. The collateral
- e. The exit
- 4. You should not only make sure the company has a patent to protect their invention and avoid large companies from copying their product but you must also make sure they have the capital to fight in case they need to protect their rights.
- 5. Identify the amount of money you will have to invest and know-how, when and where they will deploy it.
- 6. You must have a contingency plan for how more capital may be raised and deployed. (Most start-ups do not estimate correctly the capital needed, so what they do is continue issuing and selling more shares via what is called capital calls. If you are unable or unwilling to invest more money, most likely your shares will be diluted and your percentage of ownership decreased)
- 7. Be aware that many start-up companies depend on a single or a hand full of inventors and also a single or a hand full of investors. This makes the structure very volatile in case someone dies or if the group does not get along so the entire company is volatile and could easily fall apart and collapse then gets sold for pennies on the dollar.
- 8. You must watch out for the legal wording in their bylaws, stock restrictions, and document disclosures because they may have some disclaimers and disclosures that protect them in case things go bad but leave you with no acceptable recourse.
- 9. You must be prepared to wait for years with no income and no liquidity. Just the hope and dream of cashing out big someday.
- 10. In many circumstances, you as an angel investor may not be in the know of things and may not be able to vote on any of the important decisions. This could be devastating for an investor who needs to be handled on, involved, and aware of each step in the process. Make sure you have the right personality for this kind of investing.
Hopefully, the above list will help you make a wiser decision. I have stated in previous blogs that I usually discourage 99.9% of wannabee angel investors from deploying any capital in start-up ideas, products and companies.
If you are an investor or a start-up company and need some consulting please contact us at [email protected].
Wishing you much success,
Cherif Medawar
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