Whether you’re an experienced serial business owner, or a first time business owner, in numerous instances during the early stage, pre-revenue phase of a new business, the entrepreneur/founder will count on friends and family for preliminary investments, and this is called the angel round of financial investments.
But there are some do’s and dont’s when it pertains to obtaining capital from angels.
Primarily, while angel investors are commonly high net-worth people, that isn’t really 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 see to it their angel is an “accredited investor” as that term is specified in Law D of the Federal Securities laws, or has a proper exemption.
Second, you can supply the angels with a company plan, or prepare a Powerpoint slide discussion, to notify them of your plans for the business. Considering that this is a private providing, there are no set demands for what needs to be divulged to your angels. Nevertheless, below’s a crucial “don’t”: all details communicated to your angel investors need to be factual, and the founder might be liable if it is found that she or he supplied materially inaccurate or deceptive info to the angels which was utilized by them as a basis to invest. So, be sure that you provide any info that you are unsure about, such as projected earnings of the business, with language showing that projections are based on price quotes, which real outcomes can vary materially from what is presented as forecasted earnings.
It’s very important that you encourage your friends and family that an investment in a new start-up business is a really risky business, and that if they are risk-adverse, they ought to not put any capital into the business. The ceo can make an example that investing in his company is the very same as purchasing a Powerball ticket; there can be a huge earnings if the company is a winner, however in all possibility, there can also be a total loss of investment.
One more essential “do” for the entrepreneur/founder: when you have numerous angels purchase the business, they are presumably going to be owners of the voting common stock. You don’t wish to need to track down your loved ones and buddies for their voting grant certain issues, such as a more financing. You would favor it if they might designate a single person to represent their ownership interests, and indication on behalf of the group. In order to achieve this objective, the ceo needs to see to it that the angels form an unique purpose entity, such as a special purpose restricted partnership, and that way, only the general partner of the investment group would need to sign any consents and management of the brand-new company won’t be impeded by having to chase after down the friends and family.