This week’s reading of Winning Angels by Amis and Stevenson focused on the topic of structuring, specifically as it pertains to investment deal structure. This is certainly not a topic in which I have a lot of experience or knowledge; however, I did find it interesting as it is obviously a very important aspect of either investing in a company or finding investors as an entrepreneur. The three structures discussed in this book include common stock, preferred convertible with various terms and convertible note with various terms.

 

The common stock structure seems to be the least structured of the three. It generally involves a little more trust in the entrepreneur and partners. The other two have more terms and offer more protection to the investor, but they can also sometimes be complicated and sour relationships between investor and entrepreneur. In a perfect world, it would be nice and simple to be able to trust everyone you are going into business with so that everyone benefits in a fair and equitable way. Unfortunately, not everyone can be trusted and when it comes to investing large amounts of money, it seems reasonable to want to have some terms set in place to protect the investment.

 

While I have never been in a position to be an angel investor to an upcoming company, I have had a recent experience of exploring the opportunity to invest/buy-in to the ownership of a business. As someone who has never been in that position before, I made sure to reach out to people who could provide me some insight and guidance into things to be looking for while doing my research and deciding if it is a worthwhile investment. I talked to other SMEs in the industry, lawyers, and CPAs. I am extremely grateful that I did because they all helped me to come to the realization that given all of the circumstances, what was being asked for would most likely not be a good investment for me at this time. The point I want to get across from my very small experience is that having a strong network can be vitally beneficial when it comes to dealing with aspects of business that you may not have much experience with. I not only utilized preexisting connections, but I also branched out and made new ones through this process. While things did not work out how I originally hoped or envisioned, I certainly learned a lot.

8 thoughts on “Angel Investing: Structuring

  1. Katherine Pearson says:

    Zach,
    Great advise on reaching out to people. I was in the same boat about six years ago. My boss at the time wanted me to invest in another business she was starting. I started with my financial advisor and that was all it took. I didn’t have a good feeling about it, but told her I would think it over and get advise, so I did. He told me the business would not last six months and he was right, it lasted about three. The main thing looking back over that experience that I now see because of reading this book is she lacked structure. I know that isn’t the most important thing in every situation, but that is one thing that killed her business. I am glad I did not invest and I am sure you are as well. These life experiences will be so beneficial when it is our turn. Great review.

  2. Hi Zach,

    Congrats on the recent buy-in opportunity! Overall, this section just reinforced the idea that if I ever move into this realm that I need to find a good lawyer and good accountant. While I have a limited understanding I’m sure many of these processes I feel like they are intentionally obtuse so that those in the know always come out on top. One section that stuck out to me was the idea of planning for failure. I find that to be vital in life. Just knowing what failure can mean can help you resist the blow when it comes.

    Brian G.

  3. Victoria Price says:

    Zach,

    That’s really cool you had an investment opportunity like that! I also don’t have any experience with investing but I find the book and the topics interesting, even if I have to bring myself around to some of the ideas like keeping structures simple. I don’t think I could ever have an investment agreement that was too loosely structured. Common stock structure likely would not be what I was the most comfortable with if I was investing, but I’ve never actually done it before so who is to really say? I really appreciate your advice to seek guidance when doing anything resembling an investment, that seems to be a very wise, smart move that could hopefully prevent any pitfalls.

    Great post!
    Victoria Price

  4. Hi Zach,

    Awesome post and I really enjoyed your perspective on this. That sounds like a really neat investment opportunity! I doubt I will ever be in the position to be an angel investor myself, but have found out readings to be invaluable already in terms of understanding the general climate. That is great that you were able to network effectively with a wide range of experts and avoid what might have proved to be a poor investment for you in the end. Great work!

    Cheers,

    Taylor

  5. Hi Zach,

    I feel you gave some great guidance and experience that we would all be wise to follow. Getting feedback from SME’s in the space and other experts before investing. Kudos to you, as I have made some mistakes that I could have avoided if I had sought better counsel. Best, Ed

  6. Hey Zach,

    I had mentioned in my reflection and several other comments that the common approach reminds a lot of buying an over-the-counter stock in the stock market where the cost of the stock is low; there isn’t a ton of resources about the stock. It’s a high-risk/high reward type of opportunity. In contrast, the other two kinds of approach are more of a specific type of investment, like investing in a blue-chip stock where there are better exit strategies/protection.

    I agree with you that having a trustworthy network is crucial in the business world to make sure you are making the right decision but also to have the right expectations set that even if an investment doesn’t work out the way you planned, that you know what you were getting into and the downside options are better then if you had gone into a standard structure investment.

    Best,

    Stokes Warren

  7. Zach,
    Like you, I had very little knowledge on this topic when beginning the chapter, but can agree that if I were in a position to invest a large amount of money into an idea/person, I would much rather use one of the secure methods. It may be a bit more tedious and time consuming, but will likely prove in the end to be worth it. Risk versus reward can very difficult things to weight out unless you know exactly what you are getting yourself into. Taking the time to research market conditions, what is already out there that is similar, etc. will prove to be worth it in the end.
    Great post!
    Brittany

  8. Zach:

    I agree that structuring a deal is important to both the entrepreneur and the investor. The agreement lays out how people will be paid and what happens if things go bad. Trust between parties is important, and covering all the areas that are likely to be contentious in a bad situation is wise. I appreciate you sharing your experience the resources you used to help you make your decision. This provides a good example of a network in action on a scale I can relate with.

    Adam

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