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how to fund a startup
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how to fund a startup
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Who pays the legal bills for this deal? The startup, remember, only has a couple thousand left. In practice this turns out to be a sticky problem that usually gets solved in some improvised way. Maybe the startup can find lawyers who will do it cheaply in the hope of future work if the startup succeeds. Maybe someone has a lawyer friend. Maybe the angel pays for his lawyer to represent both sides. Make sure if you take the latter route that the lawyer is representing you rather than merely advising you, or his only duty is to the investor.
An angel investing $200k would probably expect a seat on the board of directors. He might also want preferred stock, meaning a special class of stock that has some additional rights over the common stock everyone else has. Typically these rights include vetoes over major strategic decisions, protection against being diluted in future rounds, and the right to get one's investment back first if the company is sold.
Some investors might expect the founders to accept vesting for a sum this size, and others wouldn't. VCs are more likely to require vesting than angels.
I should add that vesting is also a way for founders to protect themselves against one another. It solves the problem of what to do if one of the founders quits. So some founders impose it on themselves when they start the company.
The point after you get the first big chunk of angel money will usually be the happiest phase in a startup's life. It's a lot like being a postdoc: you have no immediate financial worries, and few responsibilities. You get to work on juicy kinds of work, like designing software. You don't have to spend time on bureaucratic stuff, because you haven't hired any bureaucrats yet. Enjoy it while it lasts, and get as much done as you can, because you will never again be so productive.
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