A few months ago, as a bootstrapping entrepreneur, Jeffrey was his own boss; and his first and only daily priority was to delight and amaze his clients - at a profit. Now, as an angel-funded business manager, Jeffrey reports to his brand-new Board of Directors; and his first and only daily priority is to prepare his company for near-term acquisition by some unknown set of new bosses.
If his company is acquired, Jeffrey will, indeed, enjoy a very nice monetary payday. He will also enter contractual involuntary servitude for three years or more, because the new owners always want to lock up the key talent as part of the deal.
Jeffrey is satisfied with his situation. The trade-offs are acceptable. But not all stories end this way.
If you want to fly with the angels, you have to fulfill all the entry requirements for heaven.
Financial angels do not dispense charity. They invest in early stage, risky businesses with the clear expectation of extraordinary returns. They mitigate their risk by considering many, many alternatives, selecting only a few. And they often attempt to limit their risk further by actively participating in the management of their portfolio companies, almost always at the Board level and sometimes beyond.
Do you need angel investment, or just want it? Are you just trying to reduce your risk by transferring it to others? Or is there a clear strategic need for a cash infusion?
Once you are sure you need outside funding, be ready for a long grind. It wasn't easy for Jeffrey to secure his investment. Locating, attracting, and convincing a double digit number of angels is a grueling process. And if you succeed in raising the money, your life changes forever - just like Jeffrey.
Once you take a single dollar of somebody else's money, your job is to sell your company, quickly and at a high multiple. If that quest goes well, and stays on the timeline, you may have a nice ride. If it does not, ouch!
Startup heaven can be transformed into a much less appealing place almost overnight.
Angel investment arrangements always include covenants that give the investors more and more control in case of missed milestones. These covenants may all be quite reasonable and equitable, but they are nonetheless painful if they are invoked. Some good friends of mine were squeezed all the way out of their company by disappointed angels. That doesn't happen often; but it's not a pleasant experience if you are on the receiving end.
So - angel investment should be strategically important and acceptably risky, not only to the angels, but to you, the bootstrapping entrepreneur. They might lose their money. You might lose your company.
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