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how to fund a startup
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how to fund a startup
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Deal terms with angels vary a lot. There are no generally accepted standards. Sometimes angels' deal terms are as fearsome as VCs'. Other angels, particularly in the earliest stages, will invest based on a two-page agreement.
Angels who only invest occasionally may not themselves know what terms they want. They just want to invest in this startup. What kind of anti-dilution protection do they want? Hell if they know. In these situations, the deal terms tend to be random: the angel asks his lawyer to create a vanilla agreement, and the terms end up being whatever the lawyer considers vanilla. Which in practice usually means, whatever existing agreement he finds lying around his firm.
These heaps o' boilerplate are a problem for small startups, because they tend to grow into the union of all preceding documents. I know of one startup that got from an angel investor what amounted to a five hundred pound handshake: after deciding to invest, the angel presented them with a 70-page agreement. The startup didn't have enough money to pay a lawyer even to read it, let alone negotiate the terms, so the deal fell through.
One solution to this problem would be to have the startup's lawyer produce the agreement, instead of the angel's. Some angels might balk at this, but others would probably welcome it.
Inexperienced angels often get cold feet when the time comes to write that big check. In our startup, one of the two angels in the initial round took months to pay us, and only did after repeated nagging from our lawyer, who was also, fortunately, his lawyer.
It's obvious why investors delay. Investing in startups is risky! When a company is only two months old, every day you wait gives you 1.7% more data about their trajectory. But the investor is already being compensated for that risk in the low price of the stock, so it is unfair to delay.
Fair or not, investors do it if you let them. Even VCs do it. And funding delays are a big distraction for founders, who ought to be working on their company, not worrying about investors. What's a startup to do? With both investors and acquirers, the only leverage you have is competition. If an investor knows you have other investors lined up, he'll be a lot more eager to close-- and not just because he'll worry about losing the deal, but because if other investors are interested, you must be worth investing in. It's the same with acquisitions. No one wants to buy you till someone else wants to buy you, and then everyone wants to buy you.
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