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Guide To Raising Capital From Angel Investors Ebook From The Startup Garage PDF
Guide To Raising Capital From Angel Investors Ebook From The Startup Garage PDF
THE STARTUP TOOLKI T SER IES | Guide to Raising Capital from Angel Investors | 3
INTRODUCTION
Business Plan
Product Development
Founding Team, Key Hires, Advisory Board
Legal
Intellectual property
Market Validation
Funding Timeline
10
12
Preparing Your Talking Points
Preparing Your Paperwork
14
16
17
18
Legal Issues
20
THE STARTUP TOOLKI T SER IES | Guide to Raising Capital from Angel Investors | 4
TYLER JENSEN
In 2008, Tyler founded The Startup Garage to help entrepreneurs and business
owners achieve success in their business ventures, as well as their lives. Tyler is a
serial entrepreneur, having launched or help launch over 100 companies, including
non-profits and social enterprises. He has developed an extensive network of business
relationships focused on achieving the milestones investors care about.
Tyler heads up The Startup Garage team, which has helped raise over $200 million for
startup businesses.
THE STARTUP TOOLKI T SER IES | Guide to Raising Capital from Angel Investors | 5
Introduction
Startup Funding Timeline for High Growth Businesses
Startup funding for high growth businesses is acquired in multiple rounds throughout
the business lifecycle. This funding cycle applies for most high growth businesses
including mobile, web, manufacturing and other tech industries, as well as consumer
brands. This lifecycle is different for small businesses that only need enough funding to
get the business off the ground.
High-growth startup funding is typically split into three rounds:
Family, Friends and Founder (FFF) capital ranging
from $25,000 to $50,000
Seed Capital from Angel Investors ranging from
$250,000 to $750,000
Series A and Series B capital from Venture Capitalists
ranging from $3,000,000 to $10,000,000
The most important principle of startup fundraising that
every entrepreneur needs to know regardless of the round of
capital they are targeting is: raise enough capital to achieve
a set of milestones that will allow the company to attract the
next round of investment. Initial capital from friends, family,
and founders (FFF) should be used to achieve the milestones
that will attract seed or angel investors and the use of your
seed or angel funding should be directed towards achieving
the milestones that will attract Series A investors or venture
capitalists.
Do you have
questions?
Give us a call to talk
about your specific
situation.
(800)385-7984
THE STARTUP TOOLKI T SER IES | Guide to Raising Capital from Angel Investors | 6
Business Plan
You may have self-financed the initial startup costs and/or raised FFF capital without
a business plan, but in order to attract seed investment from angel investors you
will need a comprehensive plan. This should be complete with extensive market
research and a detailed financial model. A major piece of the business plan will be your
capitalization strategy demonstrating the milestone timeline discussed above as well as
the effects of accomplished milestones on the companys future valuation.
Product Development
Depending on the complexity of your product you may or may not be able to complete
a working prototype or beta version with your seed capital. If not, at the bare
minimum you will need an interactive wireframe or mockup to demonstrate product
features and functionality. You will also need proposals for the cost to develop the
minimum viable product (the features that allow the product to be deployed).
THE STARTUP TOOLKI T SER IES | Guide to Raising Capital from Angel Investors | 7
Legal
Be sure to budget a small amount ($2,500 $5,000) of your startup capital to ensure
that you legally setup your firm. Work with a lawyer to ensure that you are setting up
the business according to whats best, given your goals and capitalization strategy. Its
better to pay a little now and get it right rather than have to go through the costly and
arduous transition down the road. There will be some additional legal fees to complete
the paperwork to close the fundraising round.
Intellectual property
If your business can secure any intellectual property
rights now would be the time to do it. Common types of
IP rights include copyright, trademarks, patents, design
rights, and trade secrets.
Want more
information?
Access extensive
business planning info
and advice on our blog.
TheStartupGarage.com/
Blog
Market Validation
While all of these milestones are vital to the success of
raising seed capital, market validation is towards the
top of the list. In your pitch to FFF investors you told
them that there was a need for your product in the
market. In your pitch to seed investors, its necessary
to show investors this need. If you were able to build
your product or a working prototype or beta version,
its time to get either paying customers or free users.
Obtain customer feedback and demonstrate that your
product is fulfilling a real market need.
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the end goal of success, and has the belief in their idea to see it through the tough
times without being derailed. However, the passion must be balanced with an ability
to accept advice and guidance and to not be stubborn with a piece of your business
that is not working to full potential. As a former entrepreneur, your angel will want to
provide you with their feedback and expect you to be receptive to it.
Aside from the personality of the entrepreneur, there are
a variety of other things that an angel may be looking for.
They will want to see that an entrepreneur has invested
their own money into the company, which is a sign that
the entrepreneur believes in the idea enough to risk their
personal finances on it. The angel also does not want to
hear an entrepreneur claim that they have no competition,
because any angels know this is simply not true. Angels
want to be assured their investment will be used 100%
to grow the company, rather than pay any outstanding
liabilities or large salaries for the entrepreneur. Angels
will be wary of a company that is heavily dependent on
licensing, because it adds another layer of unpredictability
to the deal. An angel will also look unfavorably on a
company that does not have any external board members
on either the board of directors or board of advisors, as
this is a sign of hesitancy to accept objective advice.
Want to connect
on LinkedIn?
Meet Tyler on LinkedIn
www.linkedin.com/in/
tylerwjensen
THE STARTUP TOOLKI T SER IES | Guide to Raising Capital from Angel Investors | 12
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Due Diligence Documents: Before an angel gives you money, he or she will perform
what is known as due diligence. Essentially, the angel is doing research into your
startup to make sure he or she didnt miss anything. Make sure you have the following
prepared so angels can perform their due diligence without delay:
Background of the company
Background of the companys management
The companys business plan
Financials
Management discussion of the company performance
Capitalization table
Leases
Employment agreements
Purchase or sale agreements
Previous letters of intent
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Accreditation
An accredited investor is one who meets specific criteria as defined by Regulation D
of the Securities Act of 1933. The angel investor must have an individual net worth
(either alone or joint with their spouse) that exceeds $1 million at the time of
investment, or have an annual income that exceeds $200,000 (or $300,000 if joint
with spouse) for the two preceding years and reasonably expects the income to remain
stable in the current year, to be considered an accredited investor. If your investors are
accredited, then you do not need to create a PPM to go along with their investment.
The purpose of the PPM is to give the investor full disclosure of the risks of the
investment. But an investor who qualifies as an accredited investor can bear the risk
of a complete loss of their investment and is presumed to be a sophisticated investor.
Regulation D makes it possible for entrepreneurs to avoid the costs of preparing a PPM
by pairing them with investors who are sufficiently positioned to assess the merits of
the investment independently and to bear the costs of an investment that goes sour.
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Term Sheet: A term sheet outlines the details of the investment you and the angel agree
on. Some of the things you should include on a term sheet are:
Type of financing: debt or equity
If debt, will it be convertible? Secured or unsecured?
If equity, will the stock be common or preferred?
Amount of financing
Will the angel be active or passive after the investment has been made?
What happens if the company faces a liquidity event during the course of the
investment?
Negotiation Strategies: When it comes to the part of the deal with your angel investor
where a valuation must be determined, make sure you are prepared. The valuation will
likely fall below what you consider to be the value of your company, but there are many
factors that contribute to an objective valuation. A valuation can assess your companys
liquidity, cash flow, and the value of similar companies. You must also consider the value
of the angel themselves, especially if they are well-connected in the investment world,
have a lot of experience and advice, and if they provide an opportunity for follow-up
funding.
THE STARTUP TOOLKI T SER IES | Guide to Raising Capital from Angel Investors | 20
The Startup Garage helps startups achieve the milestones investors care about. Visit our
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