Unlike VCs who may find that a founding CEO’s performance does not live up to the expectations is grounds for dismissal, angel investors are less likely to operate this way. This is primarily because they don’t have the same rights as a VC might who has board seat or even a controlling share of equity. So this fear with respect to angel investors may be a bit of unnecessary paranoia but of course, the terms of the deal with your angel investor may give them sufficient power to do this. It’s not conventional but if you’re backed by a sole angel investor who has significant rights should things not be going well, this may be a real fear.
Angel investors are pure capitalists looking for a return at all costs While the naysayers and the real conspiracy theorists think accepting VC is tantamount to a “Faustian bargain,” and that venture capitalists are wolves in sheep’s clothing, angel investors generally don’t get painted with such a broad negative brush.
Yes, as we have discussed, angels are interested in returns, and angel investing is not a charitable or not for profit industry, but angels do generally have an altruistic element to why they angel invest. Many, as successful entrepreneurs or corporate leaders in their own right, were given mentorship or a break by someone along the way which proved instrumental in their ultimate success and so angel investment is a way to pay it forward.
Of course, as always, not every angel investor is the same. It is a large and heterogeneous group, and so there may be the angel investors out there looking for only a return who will screw you over to make a dollar. But if you believe in efficient markets, these folks will be found out. More importantly, you can only be screwed over if you allow it which usually means through improper structuring of your legal agreements with an angel investor. So when finalizing fundraising docs with an angel investor (or a venture capitalist), imagine if the terms in it are acceptable should the proverbial wheels fall of. At the time of fundraising, everyone is happy and full of zest and enthusiasm for the venture. It is when things start going south or not as planned is when your legal protections or lack thereof can come back to bite you. At this time, even the nicest angel may seek to minimize damage. If you didn’t do your homework when signing up the docs or if you were so desperate that you agreed to every crazy term to your detriment then it’s too late now.
Of course, there is an emerging pattern of standardized angel and venture investment docs which may help avoid some of these ‘traps’ but there is no standardization or ubiquity yet in the use of such docs.