Todd Vernon (CEO, Lijit) has an excellent post today on Angel Investing. Todd creates and describes five broad categories of angel investors: The Family, Relationship, Idea, Once Removed and Arc Angel Investor. The post describes characteristics of each type of angel investor. More importantly, tries to set an entrepreneur's expectations about engaging with each type of investor.
One point that I think Todd missed was that a particular individual investor may be categorized differently depending on the type of opportunity. When I look at Todd's list of five categories, I think to myself that I could fall into any one of the categories depending on the investment opportunity. The key takeaway for an entrepreneur is to not make a sweeping generalization about a potential angel investor off of his or her past investment activity OR what you might pick up from chatting with an entrepreneurial peer over coffee.
My suggestion is to get to know the potential angel investor. Ask questions that will help you match the investor with Todd's categories and keep an open mind. Remember that each investing situation is different and that an angel investor's life situation may will vary over time.
Todd also has several good comments in his sections on Size of Investment, Pre-Money Valuation, Investment Mechanism and Liquidity. I agree with all of his comments, but probably do not share Todd's position on convertible notes. I have seen and used convertible notes structured in ways that address Todd's concerns. That being said, I do have a preference for equity over convertible notes, but evaluate each opportunity on a case by case basis.
One topic I had hoped Todd would have addressed is the issue of founder vesting of their equity. Brad Feld has a fine post on vesting in the context of a VC term sheet. I contend that the same principle of alignment of interest between angel investors and the entrepreneurial team exists and should be addressed in the angel round. Why wouldn't it?
Yellow flags are raised if I find a newly formed company does not have vesting of the equity owned by the founders and key employees. The latter is usually addressed via the new company's Equity Incentive Plan. The former may as well, but usually has a couple of unique characteristics. The presence of vesting of founders' equity, typically documented in a Restricted Stock Agreement between the company and each of the founders, is usually a good indicator of the quality of the advice and experience of the team.
The absence of vesting can be a good topic of discussion between the management team and the investor(s). This discussion may give the investor insight into the team's prospective on control, alignment of interest and expectations for future institutional investment. I and most of the angel investors that I have worked with in the past will not invest in situations where the founding team is not already or starts a vesting program coincident with the angel round.
The duration of the vesting is key. Most vesting durations, that I have seen, fall within a range of three to five years. A key determinant of the initial vesting duration is the expected amount of time between the investment and either liquidity event or when the company has matured to the point where the departure of the founder(s) does not catastrophically damage the company. Notice that the vesting duration is not a function of the age of the company at the time of the investment.
My advice to management teams considering seeking experienced angel investors (all of Todd's characterizations except the Family Investor) is talk to their advisers about the pros and cons of vesting of founders' equity and to be ready to have honest and thoughtful discussions with potential investors. Don't be surprised if the issue arises early in your dialog with experienced individual investors.
I suspect that I have used the unit and its heart monitor capability on 90% of the sport activities during the last year. I might have enough data points to compare and contrast my mean heart rate for several different types of activities (bpm):
