The fourth fundamental in the book Winning Angels: The 7 Fundamentals of Early Stage Investing, is “Structuring”. Being that we are concentrating on organically growing your business, it is important to understand the different kind of investors there are so that you pick the right one for your start up.While this type of business growth usually takes more research, time, and sweat, it is still ideal when the entrepreneur is not working with much cash flow.
In this article I plan on shortly summarizing the two types of investors when dealing with business structure: the investor who feels structure is essential and the investor who feels structure is irrelevant. Depending on your needs and the industry you are in, it will be vital to understand the difference so that you find the perfect angel.
There are three fundamental structures that are important to understand in order to really grasp which side of the structure line your angel investor is on. Investopedia defines the three fundamentals structures as:
Common Stock – A security that represents ownership in a corporation. Holders of common stock exercise control by electing a board of directors and voting on corporate policy. Common stockholders are on the bottom of the priority ladder for ownership structure. In the event of liquidation, common shareholders have rights to a company’s assets only after bondholders, preferred shareholders and other debt holders have been paid in full
Convertible Preferred Stock – Preferred stock that includes an option for the holder to convert the preferred shares into a fixed number of common shares, usually anytime after a predetermined date.
Convertible Note – A debt security that contains an option where the note will be converted into a predefined amount of the issuer’s shares. A senior convertible note has priority over all other debt securities issued by the same organization
- Controlling, coaching and previously burned angels
- Micromanages the entrepreneurial team
- Puts imprint on the deal structure and price
- Strong investment parameters
- Wants to be able to veto certain activities
The Investor Who Feels Structure is Irrelevant
- Enlightened, so-called virgin and winning angels
- They focus on trust
- Usually avoids hard negotiations
- They look for a “quality entrepreneur”
- Vested but less involved
- They know it’s a high-risk proposition and are willing to take the risk without added protection
As the entrepreneur it is your responsibility to do the research when it comes to the three fundamental structures in detail and to truly understand your investor’s business personality.
Another important fact to remember is that you must structure your business with investors in mind.This will be crucial when building the type of structure that will be beneficial to all parties involved. Taking the time to educate yourself on standard practices will save your business money in the long run. It is also good to speak with an experienced lawyer before signing any deals with your angel.
Amis, D., & Stevenson, H. (2001). Winning Angels: The 7 Fundamentals of Early Stage Investing. London: FT Press
http://www.investopedia.com/terms/c/commonstock.asp#ixzz3e7WEz6Uz
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