Saturday, August 15, 2009

Angel Investors entrepreneurs should avoid

Most entrepreneurs who have used angel investors in South Africa will tell you that it has been a great experience and that they probably will do it again should the opportunity occurs. Once an angel investor has accepted your business plan and proposal for an workable relationship has been agreed to by both of you, often the sky is really the limit to what you can achieve.

Unfortunately and I have to stress that this is in the minority, from time to time you will find that there are some Angel investors you may wish you rather avoided. The investors may come in various guises and although initially pleasant be sensitive to small signs that the relationship may not always be so rosy.

Hear are a few examples of Angel Investors to avoid:
Control Freak Angel Investor: This angel investor is a great source of capital but the moment your business hits a pothole, the investor is ready to start controlling your business. The control freak angel investor usually relies on special clauses in the contract that give him more power if you fail to perform a duty. This is how a control freak attempts to take over your business and run it as his own, thus creating a tension between his tendency to interfere with the entrepreneur’s creative control.

Micro-Manager Angel Investor: On the surface, this looks like the ideal investor; he wants to lend you the capital to grow your business and he offers his expertise, for free. However, after a while it becomes apparent that this investor tries to involve himself in every aspect of your business. The angel investor will either annoy you by trying to offer help in the simplest tasks or he will be so worried over his investment that he checks on every single operation. While some micro-managing angel investors will simply exit the investment, it’s not always the case. Some become litigious investors.

The Litigious Investor: The litigious investor knows you lack the funds to fight a lengthy court case so they will look for any opportunity to take you to court. Rather than helping your business succeed, this type of angel investor tries to squeeze money out of you through threats, intimidation and legal action. The litigious angel investor looks for the slightest error–failing to send him stock certificates, failing to keep him informed in a timely manner, etc. Some entrepreneurs certainly should be taken to court but there are some angel investors that exploit this means for their own gains.

The Street provides us with a few tips for avoiding these nightmare angel investors:

Whenever possible, only accept investments from credible, professional investing organizations — not private individuals.

If you are a raw start-up and have no choice but to accept investments from private “angel” investors, do the following: Ask what other companies they’ve invested in and talk to the CEOs of those companies to find out what kind of investor they’ve been. Also, make sure your lawyer writes the investment document — not your investor. This document should be standard for all your investors and not negotiated on a one-on-one basis. Watch out for any attempts to add clauses that can come back to bite you. And don’t eat any soup that tastes funny.

Whenever possible, hire an investment banker to prepare a proper Private Placement Memorandum that’s consistent with National Association of Securities Dealers requirements. We generally refer to PPMs as “anti-investment” documents because they warn the investor about everything that could potentially go wrong, minimizing any basis for a lawsuit.

Divide your investors into two categories: pure investors and those you feel may bring additional value. For those in the first category, don’t encourage or allow them to “get actively involved” in the company. Be polite but firm in telling them you’ll keep them informed of your progress through written means only. If you want more active involvement, you’ll ask them to formally join an advisory board or the board of directors. However, if you do so, there will be strict, written guidelines as to what is expected.

Our Sponsors

This Blog is co-sponsored by
SA Investors Network
SA Business Plans