What is an Angel Investment?
An angel investment is when an individual, such as an established business owner, supports a startup company by investing in it and receives equity in exchange.
Sometimes, the business owner will provide other services, such as mentorship, employee recruitment, or providing business advice.
If you’re interested in angel investment or you’re hoping to make use of it for your business, read the rest of this article. We’ll cover important aspects of angel investment, such as how it works, its pros and cons, and how a lawyer can help you with securing angel investment.
How Does Angel Investment Work?
There are some steps involved in startups working with angel investors. These usually include the following:
- Startups locate angel investors by networking or on platforms.
- The startup owners will have to research the investor to ensure that their goals are aligned and they will benefit from collaborating with this person.
- Preparing a pitch deck is an important part of finding an angel investor. This is when the startup owner provides a summary of the business.
- Negotiations will take place. The investor will make a deal and the parties will negotiate its terms so that they find a favorable outcome.
- The angel investor provides a term sheet, which includes key terms governing the investment.
What are the Types of Angel Investors?
There are two main types of angel investors.
- Generalists. These are investors who support a variety of startups, and they’ve gained expertise from having been business founders. Their experience is invaluable for startups fresh on the scene.
- Specialists. Angel investors are regarded as specialists when they have experience in subsectors. They provide a unique or niche expertise that can match your company’s goals.
What’s Included in a Term Sheet?
An angel investor’s term sheet is a legal document that contains information such as the following:
- The type of investment involved, such as common or preferred shares.
- Investor voting rights.
- Liquidation preferences. This refers to how owners in the startup will be paid during liquidation.
- Confidentiality agreements.
What Funding are Angel Investors Involved in?
It’s common for angel investors to get involved in a startup during their early funding rounds, but that depends on their level of involvement. Here ar some funding rounds in which angel investors will contribute.
- Pre-seed funding. This is usually the first round of fundraising where startups require capital. Reeling in an angel investor can be beneficial, especially if they provide huge amounts to assist the company.
- Seed funding. At this stage, a startup has already started to become established and angel investors will be interested in the company’s growth trajectory.
- Bridge rounds. These are shorter rounds that enable a startup to hit important milestones, so an angel investor can help with funding to help them achieve their goals.
How Do You Find the Right Angel Investor?
When meeting an angel investor interested in your startup, it’s essential to exercise due diligence so that you make the right decision to benefit your business. Here are some tips to bear in mind.
- Check their references. Do some research into the angel investor’s previous investments. If you’ve found them in your network, consult people who have worked with them.
- Check that they’re accredited. Angel investors should be accredited, which means they need to earn a net worth of over $1 million and meet other professional criteria. You can find more details about how investors can be accredited by visiting the U.S. Securities and Exchange Commission.
- Confirm their level of involvement. You want to know how much your angel investor will be helping your business, such as if they will be providing services other than funding.
What Legal Documents Do You Need for an Angel Investment?
You’ll require the following legal documents when setting up an angel investment.
Term Sheet
This includes information about the deal and it involves negotiation between parties to set down the process of the investment. It will clearly set out the timeline, from when the parties have signed the term sheet to its closing date.
Investment and Shareholders’ Agreement
An investment agreement outlines the investment terms, so that all parties are aware of the investment amounts and investor rights to better govern the working relationship. It’s typical for these agreements to include information about the investment’s early rounds of funding.
A shareholders’ agreement, on the other hand, clarifies the rights and duties of shareholders, including the rights the angel investor will obtain. This contract defines the ongoing relationship between parties.
Articles of Association
It’s common for the business to draft new articles of association when the funding has come to a close. These documents specify the company’s internal rules, such as its management, share transfer, voting rights, and more.
Disclosure Letter
This letter is drafted by the startup founders and given to the angel investor to alert them of any warranty exceptions in the investment agreement so that they’re made aware of all risks or other concerns that could arise. This serves to protect the startup founders.
Do You Need a Lawyer for an Angel Investment?
Lawyers can help you with your angel investment. They’ll review all terms in your agreement to protect your interests and limitations. They’ll clear up any unclear terms that could put you at risk.
They’ll closely review all legal documents that include information about investment details, funding amounts, and payment terms.
It’s essential to review the contracts and other documents before finalizing the agreement so that you’re happy with all included terms. If there are any vague or misleading terms, this could result in issues or disputes in the future, putting you at financial risk.
Get a legal review of your angel investment contract by consulting with a lawyer on ContractsCounsel, an online legal marketplace where clients connect with vetted lawyers experienced in angel investments.
You can book a review with a lawyer on the platform by going to ContractsCounsel marketplace. Post your project for free and include some details so lawyers know what you require. Lawyers interested in the project will reach out to you with bids. You can review the lawyers’ profiles, experience, and client ratings before choosing one to work with.
Other ways in which lawyers will help you include:
- They’ll assist you with negotiations, such as with term sheets, to ensure that all its terms protect your interests.
- They restrict angel investor power so that your startup founders maintain control, such as in terms of voting rights.
- They can help to minimize your personal liability should something go wrong.
Do you need to hire a lawyer for an angel investment?
Hire an investment lawyer on ContractsCounsel. They have years of experience in assisting clients with investment agreements and guide you on all aspects of angel investments so you make the best choice for your startup to succeed.
