Whether you’re a seasoned serial entrepreneur, or a first time entrepreneur, in many instances during the early stage, pre-revenue stage of a new company, the entrepreneur/founder will turn to family and friends for initial investments, and this is called the angel round of investments. But there are some do’s and dont’s when it comes to soliciting capital from angels.
First and foremost, while angel investors are often high net-worth individuals, that isn’t always the case. And soliciting them for funds for your company is a securities offering, governed by Federal and State securities laws. Thus, one of the “do’s” for the entrepreneur/founder is to make sure their angel is an “accredited investor” as that term is defined in Regulation D of the Federal Securities laws, or has an appropriate exemption.
Second, you can provide the angels with a business plan, or prepare a Powerpoint slide presentation, to inform them of your plans for the company. Since this is a private offering, there are no set requirements for what has to be disclosed to your angels. However, here’s an important “don’t”: all information relayed to your angel investors must be factual, and the founder may be liable if it is found that he or she provided materially incorrect or fraudulent information to the angels which was used by them as a basis to invest. So, be sure that you present any information that you are unsure about, such as projected revenues of the company, with language indicating that projections are based on estimates, and that actual results can vary materially from what is presented as projected revenues.
It’s very important that you advise your family and friends that an investment in a new startup company is a very risky business, and that if they are risk-adverse, they should not put any capital into the company. The founder can make an analogy that investing in his company is the same as buying a Powerball ticket; there can be a huge profit if the company is a winner, but in all likelihood, there can also be a total loss of investment.
One more very important “do” for the entrepreneur/founder: once you have many angels invest in the company, they are presumably going to be owners of the voting common stock. You don’t want to have to track down your relatives and friends for their voting consent to certain issues, such as a further financing. You would prefer it if they could designate one person to represent their ownership interests, and sign on behalf of the group. In order to accomplish this goal, the founder should make sure that the angels form a special purpose entity, such as a special purpose limited partnership, and that way, only the general partner of the investment group would have to sign any consents and management of the new company won’t be impeded by having to chase down the friends and family.