When the investor is ready to finance your company, the complicated process of closing the deal begins. This involves some lawyers and a lot of documents. Don’t expect to take any shortcuts in this process. But you certainly can expedite matters by conducting a thorough preparation of terms with the investor.
Most angel investment is provided in exchange for equity in a company. Combination loan and equity arrangement are possible. Entrepreneurs like these because they want to retain equity. There are plenty of exotic debt instruments that permit investor conversion to equity on a future date. If your angel investor is savvy and experienced, he will reject such arrangements. Entrepreneurs are wise to avoid trying to force them on investors. The result is likely to involve entrepreneurs having all the equity ownership in a company with no value because it lacked funding.
Entrepreneurs will not achieve value for themselves without capital. Therefore, those providing the capital rightfully expect to participate in most of the potential valuation increase. They are taking all the risk with real money and they are not going to do that for 8 or 10 percent of the company.
Keeping company capitalization simple with a basic exchange of cash for stock is most conducive to attracting seed money from an angel investor.
If the company’s success is a long-term proposition, investors are patient. They recognize that future rounds of funding will occur, likely from large institutional sources. A distant gain is tolerable when the expected reward is large enough.
The situation is different when measurable success for a company is anticipated solely with capital from the angel investor. That is bound to precipitate the investor’s interest in an exit strategy.
One possibility is a “continental put” option. This is a contractual arrangement permitting the investor to return his stock at a fixed price on a future date. When an entrepreneur achieves intended results with the investor capital, the company is able to fulfill the put obligation. A put option is drafted as a distinctive financial contract.
Despite this preparation, there are always elements that are overlooked in the closing of angel investor funding. These are resolved by communication with your investor. That arrangement is a consequence of establishing a close relationship with your angel investor as an active voice in the company.