I had occasion to participate in a panel presentation on the general topic of angel financing terms and conditions. Many of the participants were concerned about how to negotiate terms and the consequences of certain kinds of provisions. The panelists, myself included, tended to cater to this by talking about trying to avoid certain terms, etc. In the world of angel financing, the range of size of investment and length and complexity of documentation varies dramatically from the family friend who writes a check for some common stock to the sophisticated angel group that behaves much like a VC.
Upon reflection, however, all investors in this the category have at least this much in common: they invest relatively small amounts. By relatively small, I mean anything from thousands to a million or two, under some conditions. Because the investments are small, they cannot bear the weight of the kinds of transaction costs that one normally sees in a $10 million financing. By way of example, a “normal” VC financing might cost the issuer $40,000 in legal fees. $40,000 is 0.4% of 10,000,000. If you raise $250,000 in angel money you can’t spend $40,000 in fees to do it. While it might not cost you in dollars for the time you spend negotiating, it will pile up as you consult with your attorney. In addition, the further away you get from the simple, straight forward and standard, the more it will cost to document a deal.
At the end of the day, you need to know what is important to you, and I suggest that prime among the things that should be important to you is maximizing the dollars you can put to work in your business and your economics. So, look at valuation; look at dividends, the discount in a convertible note, multiple X preferences, and full ratchet antidilution. Beyond these issues, you need also to be comfortable with your investor. Sometimes you need to take your money where you can find it, but if you just don’t get along with the investor, maybe you should keep looking.
Keeping all this in mind, there is a lot of merit to closing and putting money in the bank. If the investor wants registration rights, don’t argue. Will accepting some seemingly unreasonable terms create issues later – it well could, and you may find yourself dealing with these “issues” later when they arise, but consider that in the light of (1) spending $25,000 to raise $250,000 (or less) and (2) going an additional some amount of (weeks or months) without funding.
To paraphrase the famous prayer – may God grant you the strength to negotiate the important terms, the fortitude to endure the effects of the ones you can’t (or shouldn’t) negotiate; and the wisdom to know the difference.
