What do angel investors seek as a return on their investment?
May 1, 2010 by
Filed under angel investors
We are a start up company, and have a donor interested in our company. They’ve asked us to put a report together on exactly how the funds will be allocated and what the angels will get in return for their investment. I want to offer them a couple of options. Your advice will be helpful. Thanks in advance.
1000%
Angel investors are willing to loan money for any situation based on their large fees with little to know collateral or qualifying. Hard money lenders do the same thing in real estate.
Just a warning, the decisions you are about to make will be decision that will either make or break your company and ones that you will live with until an exit event occurs or your company folds, so it is extremely important that you obtain the right legal representation right away. Angel investors aren’t necessarily looking for you to provide them with a certain return on investment figure (they’ll do that themselves) but rather what % of the company you are willing to give them in return for their investment. This comes down to the valuation of your company both pre and post investment. Most likely if they are serious about investing you will begin negotiations on the valuation: they’ll want a lower valuation and you need to fight for a higher valuation to protect as much equity for yourself and the other current owners. Typically they are looking for a return of anywhere from 10-20 times their original investment …but this depends on a lot of risk factors such as how close you are currently to a possible exit event, the scalability of the investment, the current capital structure of the company etc…..make sure you have reasonable pro forma income statements (unreasonable projections is a quck way to get angels to lose interest in an otherwise attractive opportunity) and a solid grasp on you burn rate. It’s also extremely important for you to properly analyze the funding source to ensure that the angel investors will not hurt you in later financing rounds…it’s better to walk away from a funding source then make concessions that aren’t in the best long term interest of the company. Your legal counsel should fight to avoid any non-dilution rights that the angels probably will ask for as non-dilution rights make it very difficult to obtain future funding and basically transfers the control of funding decisions away from the company to the angel investors. Again, get legal representation, someone who specializes in private equity transactions.