Angel Capital Group encourages investors to become acquainted with the leading blogs about early-stage investing. Aside from our own website, we often read the Venture Hacks blog, and we don’t mind providing a link for our members to some interesting content. The linked article addresses the issue of “mass syndication,” which is a distinction between the way angels and VCs operate, and is relevant to ACG’s way of doing business.Whenever we’re asked “how much does Angel Capital Group invest in a deal?” we give a stock answer: ACG members typically make angel-sized investments. That is, collectively, our members close deals with between $50,000 and $150,000. We add that ACG investors sometimes invest more than that amount in syndicate deals. But those who’ve read our e-books and web posts will appreciate that angel investors in seed-stage rounds are not looking to fully fund a company; they are looking to “buy a seat” for the next round of equity financing when the company has demonstrated it can execute its business model and create value for investors. That “seat” at the future investing table comes in the form of a Right of First Offer or Right of First Refusal. (Brad Feld is co-author of the excellent book Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist. We recommend you read his blog post on this.. ACG is no different than other professional angels in our not wanting to “jump in with both feet” by over-investing in an early stage deal. We’d prefer to invest a cautious, but meaningful sum, then share the risk with a number of other angel investors.

Angel Capital Group is unique compared to other angels in that we comprise our own syndicate. Other angels may be individual investors, or individuals formed into small groups; ACG’s own syndicate acts something like a “fund of funds.” Our investors can co-invest as participating funds and can add extra individual investments, in the same deal closing, as what we call “sidecars” to whatever our member funds invest. All of this activity takes place under a single ACG Series LLC—one ownership entity—for deal closings.

Beyond involving just the ACG membership, we sometimes participate in what is termed a “mass syndication” deal. The Venture Hacks article referenced above speaks to entrepreneurs hoping to raise more than the typical “angel-sized investment” from a number of investors:

“So, they take the standard term sheet that they’ve been given and they go out and do a rolling close of various convertible notes. And it generally works pretty well.”

“The keys are that you have to set the terms and the valuation very, very reasonably. In fact, you have to probably price slightly below market, because otherwise the angels don’t trust you, then they want a lead who’s done the due diligence. You have to work with people that you have warm intros with, you have to name drop like crazy, and you have to create forcing functions to get the round to close. You can’t give people all the time in the world.” That’s good advice. Entrepreneurs often set their own terms and valuations with a term sheet that they’ve generated themselves. Here’s more good advice from Venture Hacks:

“I think it’s even better to have a term sheet that comes with someone else’s authority attached…but it’s just better to start with a widely accepted circulated term sheet where you can point to it and say dozens of other startups have used this term sheet, it’s not new.”

ACG will consider term sheets created by entrepreneurs; however, we’re upfront with companies that put forward “over lawyered” deal terms or “cut-and-paste” jobs lifted from various sources on the Internet: The more complicated or unorthodox the terms are in a seed-stage deal, the less likely a company is to receive investment. What angels (especially angels from different groups in a mass syndicate) want to see are widely accepted deal terms, such as those in the Angel Capital Association or National Venture Capital Association model documents, Alliance of Angels term sheet, or the Gust Series Seed deal document. ACG investors have been comfortable in mass syndicated deals using any the term sheets from any of those recognized authorities.

Apart from entrepreneurs’ using widely accepted deal terms, the suggestion that companies should set valuations for early rounds “very, very reasonably” and “slightly below market” is important. We agree that entrepreneurs setting the bid for their own companies most times get it wrong. Valuations for seed-stage and mini-Series A deals are usually too high. For more information, here’s another helpful article. Our opinion is that angels collectively should expect to own 20-40 percent of a company, considering the amount of risk they are taking. Entrepreneurs raising small amounts, consecutively, using convertible debt (hoping to avoid their equity being priced before sales growth kicks in to solve their cash burn problem) often insist on setting a high conversion cap. They view the conversion cap in seed stage convertible debt as a price on their equity, then are frustrated after they’ve loaded up their balance sheet with debt, but can’t find Series A investors who will agree to buy at an inflated valuation. It happens all the time.

To close a deal with angels—especially a syndicate deal—entrepreneurs should stick to using standard deal terms and price their earliest rounds “to move.”

This is published under the Appalachian Regional Commission POWER Grant, PW-1835-M.

Copyright Appalachian Investors Alliance, Inc. 2018
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