Angel Syndicate is a startup investment model becoming increasingly popular among investors. Angel Syndicates involve a group of small investors, usually individual investors, jointly investing in a startup company. Each investor contributes a small amount, while the startup company receives a larger amount than if they were seeking an individual investor.
The benefits of investing in Angel Syndicates are:
Opportunities to invest in promising startups with a small amount of capital
Access to the knowledge and experience of multiple experienced investors
Minimizing investment risks and increasing chances of successful investments
Participating in the management and development process of the startup company.
Deal terms are the conditions under which an investor invests in a startup. They determine the rights, obligations, and expectations of both the investors and the startup. Angel syndicate investors need to negotiate deal terms to ensure that they get a fair return on their investment while the startup can grow and succeed. According to the research from Angel Capital Association, we can learn:
How angel syndicates negotiate the deal term
“Angel group deals have become more structured. What angel groups are doing now is very similar to what VCs were doing five years ago. Angel group deals are just as airtight and professional as VC deals.” – Paul Sciabica of New York Angels.
Indeed, both VC and angel syndicates negotiate deal terms with startups to determine the terms and conditions of their investment. The negotiation process typically involves discussions around the valuation of the startup, the amount of funding to be provided, the ownership structure, and the exit strategy. Both VC and angel syndicates also aim to negotiate terms that are favorable for their investment and reduce their risk as much as possible. However, there may be differences in the level of involvement, due diligence, and the amount of funding provided between VC and angel syndicates.
Negotiation process
Angel syndicates negotiate deal terms by considering various factors such as the reduction of risk, amount of control, and provisions for liquidity. They typically aim for a balanced term sheet that includes some provisions for the investors and some for the entrepreneur.
It is essential to consult an attorney during the negotiation process, but some angel groups prefer to negotiate the deal terms fully with the entrepreneur before bringing in the attorney to save legal fees. The attorney’s fees are usually agreed upon beforehand, and they can range from $20,000 to more, depending on the complexity of the deal.
The angel investors group’s term sheet includes various terms and conditions that are commonly considered, such as liquidity, risk, and control. The liquidity provisions may include dividend rates, registration rights, co-sale agreements, and anti-dilution provisions.
How to Prepare a Successfully Negotiation
Overall, the negotiation process aims to create a mutually beneficial deal that aligns the interests of the entrepreneurs and investors while mitigating risks and maximizing returns. Also, we could consider some necessary steps to successfully negotiate the terms of a deal with angel syndicates:
Understand the startup: Before negotiating deal terms, it’s important to understand the startup and its industry. Do your research on the market, competition, and potential risks and opportunities. This will help you determine what terms are reasonable and what you should negotiate for.
Collaborate with the lead investor: If there is a lead investor in the Angel Syndicate, collaborate with them to negotiate the deal terms. They may have more experience and knowledge about the startup and can provide valuable insights and guidance.
Be clear about expectations: Ensure that all members of the Angel Syndicate are clear about their expectations and goals for the investment. This can include factors such as the investment horizon, exit strategy, and potential returns.
Negotiate for favorable terms: Negotiating for favorable terms means striving to secure deal terms that are advantageous to the angel syndicate and its investors. This includes negotiating for favorable equity ownership percentages, board seats, voting rights, and other rights and privileges that can protect the interests of the angel syndicate and its members.
Be flexible: Be willing to compromise on certain terms in order to reach a mutually beneficial agreement with the startup. This can help build a positive relationship and set the stage for future collaborations.
Angel Syndicate Term Sheet Provisions
The term sheet for the angel investors group includes various provisions related to liquidity, risk, and control:
Liquidity Provisions
Under liquidity, there are provisions for dividends at an agreed-upon percentage, cumulative and registration rights, including two demand, unlimited piggyback, and one S-3 per year. Co-sale agreements provide for investor shares to be included on a pro-rata basis in a private sale of founder shares. All rights terminate upon an IPO.
Risk Provisions
The risk provisions include liquidation preference, which gives founders the first risk of loss while allowing investors to recapture their investment and minimum return ahead of the founders. The non-participating preferred (return capital to Series A, then remaining proceeds to Common) is provided that if the company grants participating rights to the next round of investors, then Series A will be revised to include similar rights.
There are also conversion rights, including auto-conversion on IPO at 5x purchase price with an offering size of at least $10,000,000 and permissive conversion at any time. Anti-dilution provisions come into play in a down round, where founders have a disproportionate share of dilution, and the conversion ratio of preferred is adjusted or more shares are issued to preferred. Stock splits and price-based anti-dilution are on a weighted average basis. “Ratchet” adjusts the price of old investors to new rounds but is less common.
Control Provisions
Under control provisions, major investors get the right of first refusal to maintain ownership percentage on future financing. Drag-along rights come into play if holders of 50% of the Preferred approve a proposed sale of the Company, then other involved parties will agree to approve the proposed sale. All rights terminate upon an IPO. The key person life insurance provision requires the company to obtain and maintain a “key person” life insurance policy on essential company personnel in case of their incapacitation.
The voting rights provision states that Preferred vote with Common, except as required by law, and other protective provisions may be included. Directors include one elected by Series A, one by Common, and all others elected by Common and Preferred voting together. Information rights include monthly or quarterly internal statements, and annual reviewed or audited statements. The vesting of founder shares and options is subject to a 4-year vesting schedule with 25% vesting on the first anniversary and remaining vested over the scheduled vesting rate thereafter. The vesting of employee shares is usually the same as the founder, plus the company will have the right, upon the termination of services, to repurchase any unvested shares.
Final Thoughts
In conclusion, negotiating deal terms between angel syndicates and startups is a complex process that requires both parties to have a deep understanding of the market, the product, and the potential risks and benefits. Angel syndicates often have the upper hand in negotiations due to their experience and resources. Nevertheless, startups can negotiate favorable terms by doing their research, seeking legal advice, and being prepared to walk away from a deal if necessary. Ultimately, the success of the negotiation depends on the ability of both parties to find a mutually beneficial agreement that aligns with their goals and values.