Subscribe to: CanadExport l RSS Feed    September 3, 2009

Five keys to angel financing

Steve Wandler, a Kelowna-based high-tech entrepreneur, knows a thing or two about angel financing. Wandler is the founder of YourTechOnline.com, a technology support service that was built on angel money. He has since sold his company to a competitor in Silicon Valley.

Wandler is now busy improving his golf game, but he’s also helping start-ups navigate the murky world of angel financing. He takes on an advisory role in companies in exchange for a small equity stake. CanadExport spoke to Wandler who shares five key pieces of angel advice to save you time and money:

1. Be clear on why your angel is investing.

Don’t let the angel investor sign on the dotted line until they understand why they are investing. If the angel does not understand your business, you’re setting yourself up for disaster.

The angel needs to be investing in you too, not just your product or company. Be clear as to why they’re investing in your company and set expectations that are clear at the beginning. This will set the tone for the relationship you’ll have with your angel, especially since angels are often family and friends. Be upfront. Don’t let the money cloud your objective.

2. You run your business, not the other way around.

Remember, you are the expert. Chances are good that the angel investor will not have the expertise that you do. Have confidence and put yourself in the driver’s seat.

For example, an angel might want to be updated constantly as the business grows or feel they can just walk into your office unannounced. This takes valuable time away from growing your business. Give your angels monthly or quarterly updates—though I prefer the quarterly approach.

3. Debt or equity financing?

In the beginning, I raised equity simply because someone said that was the best way to do it. Equity means selling ownership interest in a corporation in the form of common stock or preferred stock. Equity could be a preferred option when you have an angel investor that is central to your business. For example, someone that can bring in additional rounds in the future. It locks them in to your business. They can’t just say they want their money back. In other words, they’re on the boat for the ride unless they want to swim back to shore.

But later I learned about raising convertible debt. It’s like getting a loan from a bank except it’s from an angel. Both the investor and the entrepreneur understand that the debt can be converted into equity. The founder of the company maintains control of the company throughout the convertible debt process. Convertible debt is a good way to turn the investment around quickly so that the entrepreneur can get back to focusing on the business and its customers.

4. Don't cash the cheque without the proper paper work.

Spend the money you need to get the proper documentation done right. This cost me a lot of money and I learned the hard way. Understand what you want to achieve when you are taking that money. Outline this in your contract with your investor. It’s nice to get a $100,000 cheque, run to the bank and cash it but if it’s the wrong deal it can really cause problems in the long run. When you’re looking for an exit—like an acquisition—and there are problems in the contract or grey areas of understanding with the investor, you’ll regret not having done this due diligence. You don’t usually have a second chance to make changes, especially when someone is knocking on your door to acquire.

So don’t just take your lawyer’s word for it. Good legal counsel helps but ask your peers. People have been through this before. Ask them what they did. This is research you should do before the cheque arrives so you are prepared to dot your Is and cross your Ts.

5. Think big and few, not small and a slew

My biggest mistake at the beginning was taking many small chunks of money ($5,000 or less). That created problems. Those small-sum investors will show up at your annual general meetings and they’ll have a say—and rightfully so. But they can also disrupt the relationship you have with your larger key investors. Resist taking many small donations. Over time, it becomes easier to raise larger sums like $100,000 or $200,000.

Remember that it can sometimes be easier to get a seasoned investor to understand how the business should be run. For a pro, $50,000 to $100,000 is obviously a lot money, but it will probably not break their bank. However, if you’re raising $15,000 from a family member, the stakes will almost always be higher as will their expectations for profit.

For more information on the art of angel financing, contact:
Rick Rasmussen,
Trade Commissioner
Canadian Consulate in Palo Alto
Tel.: (650) 543-8800
Website of the Canadian Consulate General in San Francisco/Silicon Valley

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