I believe it makes sense to continue my crusade against angel investors asking for terms at seed stage funding that are not best practice and warn founders getting involved in such deals.
In fact, angel investors should read them as well, as not following these guidelines does not only harm the company and the founders but threatens their investment as well. Please fill free to contribute to the list by commenting!
1. Do not issue more than 10-15 % shares in your angel seed round, as you will most likely need a follow on angel round and you need to be in control of your company when raising your Series A. No VC will invest when founders do not have enough equity anymore as they consider you will not be motivated enough with even more dilution going forward.
2. Do not grant anti dilution rights to angel investors in your seed round, and if at all, limit them in time and/or amount. Chances on a downround are high as next round and you and your angel investors agreeing on a very early stage valution is great, but should not give an advantage to angel investors when raising a new round at a lower valuation. If an angel persists on getting them, (re)consider the deal or switch to a convertible loan note.
3. Do not agree in any form to your angel investors being able to exit your company when raising a new round, as no follow on investor will ever finance the exit of your angel investors. Terms like these kill your company.
4. Only issue common shares to your angel investors in your seed round, as there is no reason why they should have any preference at exit or liquidation. Equality of arms between founders and angel investors is key at seed stage. Angel investors taking too much preference over founders should consider why they do that.
5. Angels investors should invest in you and your team, and should know and consider their investment has an extremely high risk profile. Trying to limit you with too many veto rights and burdening you with too many reporting and meeting obligations keeps you away from your focus to further develop your company.
By Dave Dirks | EVO Venture Partners