May 24, 2008 at 17:32Work with Angels
Many thanks to everyone who participated in the discussion. Comments turned out to be much more interesting than the article.
Very often they ask questions, but how to work with angels? This question was asked yesterday by one of the active writers on Habré and I decided to answer here.
To begin with, let's define who the Angels are? Angels are individual investors who invest their personal money in projects, usually the amount of investment does not exceed 5% of Angel's annual income or not more than 0.5% of his fortune. Thus, the loss of money as a result of the failure of the project will not greatly affect its financial situation. Since Angels work in a zone of special risk (according to various sources, 90% of angel investments fail), they expect 10X or more return on their investments. Thus, one failure for the Angel is not terrible, and luck brings an income commensurate with the annual (or add from 5% to the state).
Angels work not only in the field of venture business. The English economy, for example, simply stands on angelic investment.
What is the difference between Angels and institutional investors (AI)? There are several options.
1. Angels invest their money, AI control strangers.
2. Investments of angels abroad usually have a top bar of $ 500k, we have 200k. AI try to invest amounts from 1m dollars.
3. Angels make an emotional deal (“I liked this person and this project and I will give him money”), AI can invest in companies that meet certain requirements.
On what conditions do angels work? In Russia, the established practice is when an angel receives from 50% + 1 to 90% + 1. Toward the end of the article, we will look at how this might affect the company in the future.
A bit of history. When the venture capital business began to take its first steps, the dilemma arose of how to determine the angel's share in the project. If you work, as venture capitalists work, through valuation, then a startup, when it exists as an idea, costs nothing. And accordingly, any investment can claim the lion's share of the company. Therefore, there were options 25% + 1, 30%, 50%, "as we agree." Over the years, a good scheme has emerged that has become traditional for angel investing. This scheme is a convertible loan.
The convertible debt scheme is as follows: Angel gives Startup a debt, which he can convert into company shares upon entering the AI at the current premoney valuation with a premium.
For inexperienced readers, I’ll give an example:
Angel invests 100k in a startup. We agreed on his premium of 25% (standard for the USA, in Russia and Ukraine it can reach 100-200%). After 9 months, a 500k venture fund invests in a startup with a premoney valuation of 1000k. So, Angel receives shares in the amount of 100k + 25% = 125k and his share before the investment is 125k / (1000k + 125k) = 0.11 = 11%.
Immediately after the investment, his share will shrink to 125k / (1000k + 125k + 500k) = 0.08 = 8%
Very often, AIs offer angels to redeem their share and bargaining and negotiations are possible here.
Why Angels Are Good
1. Angels give money when serious investors are not even ready to speak with the company.
2. If Angel engages in investment activities on a regular basis, then he may have good contacts with AI and may lead the investor to Round A
3. Often, Angels invest in companies from an industry in which they are well versed, which means they can very often help with advice or vision
4. There have been cases when the Angels have taken serious positions in startups and have been successful in this.
5. Venture capitalists are very serious about other people's investments. If a person has invested, then he believes in this company. The presence of previous rounds of investing greatly increases the company's chances of getting the next round.
What is the bad scheme of 50% + 1?
If we turn to the principles of venture business, we will see that the driving force is the entrepreneur. Investors just help him with money. The right investors always make sure that the entrepreneur does not fall motivation. If an entrepreneur cannot make decisions and earns little when selling a company, then his work efficiency will be low. Analysis of the ownership structure of AI is a very important point. It analyzes who owns which part of the company and most importantly WHY? A serious investor will never invest in a company in which Angel, who does not take an active part in the company, owns a controlling stake. So, either we need to reduce the share of the Angel or refuse the transaction. This is where the difficult negotiations begin. During which the company may die. So, getting 50% + 1,
Outside the brackets we left the work of angel funds, networks and associations.
PS. If you do not plan to attract the following rounds, then you can negotiate with the Angels without looking back. 100k is usually enough to raise an Internet project in Russia-Ukraine.
PPS For voicing these thoughts, I had unpleasant conversations with local Angels, who find it difficult to push through the 50% + 1
PPPS scheme . You can read some more articles on the topic of near-genre on my blog dennydov.livejournal.com
Very often they ask questions, but how to work with angels? This question was asked yesterday by one of the active writers on Habré and I decided to answer here.
To begin with, let's define who the Angels are? Angels are individual investors who invest their personal money in projects, usually the amount of investment does not exceed 5% of Angel's annual income or not more than 0.5% of his fortune. Thus, the loss of money as a result of the failure of the project will not greatly affect its financial situation. Since Angels work in a zone of special risk (according to various sources, 90% of angel investments fail), they expect 10X or more return on their investments. Thus, one failure for the Angel is not terrible, and luck brings an income commensurate with the annual (or add from 5% to the state).
Angels work not only in the field of venture business. The English economy, for example, simply stands on angelic investment.
What is the difference between Angels and institutional investors (AI)? There are several options.
1. Angels invest their money, AI control strangers.
2. Investments of angels abroad usually have a top bar of $ 500k, we have 200k. AI try to invest amounts from 1m dollars.
3. Angels make an emotional deal (“I liked this person and this project and I will give him money”), AI can invest in companies that meet certain requirements.
On what conditions do angels work? In Russia, the established practice is when an angel receives from 50% + 1 to 90% + 1. Toward the end of the article, we will look at how this might affect the company in the future.
A bit of history. When the venture capital business began to take its first steps, the dilemma arose of how to determine the angel's share in the project. If you work, as venture capitalists work, through valuation, then a startup, when it exists as an idea, costs nothing. And accordingly, any investment can claim the lion's share of the company. Therefore, there were options 25% + 1, 30%, 50%, "as we agree." Over the years, a good scheme has emerged that has become traditional for angel investing. This scheme is a convertible loan.
The convertible debt scheme is as follows: Angel gives Startup a debt, which he can convert into company shares upon entering the AI at the current premoney valuation with a premium.
For inexperienced readers, I’ll give an example:
Angel invests 100k in a startup. We agreed on his premium of 25% (standard for the USA, in Russia and Ukraine it can reach 100-200%). After 9 months, a 500k venture fund invests in a startup with a premoney valuation of 1000k. So, Angel receives shares in the amount of 100k + 25% = 125k and his share before the investment is 125k / (1000k + 125k) = 0.11 = 11%.
Immediately after the investment, his share will shrink to 125k / (1000k + 125k + 500k) = 0.08 = 8%
Very often, AIs offer angels to redeem their share and bargaining and negotiations are possible here.
Why Angels Are Good
1. Angels give money when serious investors are not even ready to speak with the company.
2. If Angel engages in investment activities on a regular basis, then he may have good contacts with AI and may lead the investor to Round A
3. Often, Angels invest in companies from an industry in which they are well versed, which means they can very often help with advice or vision
4. There have been cases when the Angels have taken serious positions in startups and have been successful in this.
5. Venture capitalists are very serious about other people's investments. If a person has invested, then he believes in this company. The presence of previous rounds of investing greatly increases the company's chances of getting the next round.
What is the bad scheme of 50% + 1?
If we turn to the principles of venture business, we will see that the driving force is the entrepreneur. Investors just help him with money. The right investors always make sure that the entrepreneur does not fall motivation. If an entrepreneur cannot make decisions and earns little when selling a company, then his work efficiency will be low. Analysis of the ownership structure of AI is a very important point. It analyzes who owns which part of the company and most importantly WHY? A serious investor will never invest in a company in which Angel, who does not take an active part in the company, owns a controlling stake. So, either we need to reduce the share of the Angel or refuse the transaction. This is where the difficult negotiations begin. During which the company may die. So, getting 50% + 1,
Outside the brackets we left the work of angel funds, networks and associations.
PS. If you do not plan to attract the following rounds, then you can negotiate with the Angels without looking back. 100k is usually enough to raise an Internet project in Russia-Ukraine.
PPS For voicing these thoughts, I had unpleasant conversations with local Angels, who find it difficult to push through the 50% + 1
PPPS scheme . You can read some more articles on the topic of near-genre on my blog dennydov.livejournal.com