F|R: 5 Hacks For Closing an Angel Round

Last week we offered you one founder’s rationale for taking money from angel investors, instead of venture capitalists. It’s a trade-off of sorts: smaller checks, but they often come with better deal terms. Some readers took slight umbrage at this proposition:

“The reality is that our deal terms are going to be the same as a VCs,” says Ian Sobieski of the Silicon Valley-based Band of Angels. “We also want five to 15X returns, it’s just that since we’re only investing $500,000, we can get it at a much lower exit than a VC.”

In other words, just because angels cut smaller checks, don’t expect closing angel funding to be any easier. Competition is tight, says Sobieski. “The Band sees 60 deals a month, and usually accepts one. We’re very selective.”

Being a former founder, Sobieski knows a think or two about jumping through hoops to get a check. So below he offers a few tips to help you close that angel deal, so you can get back to the real work of running your startup.

5 Hacks For Closing an Angel Round:

1. Accept a lower valuation.
Train yourself not to think of valuation as the value of your company. That makes it too personal. Valuation is just a trade off of time from the moment you get your financing, to the moment you receive your ultimate payoff. If you want to close your funding sooner, take your valuation down a notch and give your investors “a great deal.” This means selling me one-third of your company for $500,000, which is still a smart, $1 million pre-money valuation.

2. Use the same lawyer as your investors.
You need a lawyer to explain the law and to draft documents. But when a lawyer works for just one party in a transaction, s/he tends to get engaged in business decisions. This can drive up legal fees. When you use one lawyer for both sides, decision-making stays between entrepreneur and investor, as it should. Hire a good lawyer, just make sure your attorney is willing to sign a waiver saying they will represent both sides in the transaction. (Expect kicking and screaming; this will slash their legal fees.)

3. Bring an advocate.
Find someone outside your company who can vouch for you with your prospective angel(s). It does not need to be a “gray-haired type,” but it must be someone outside your founding team.

4. Identify your company’s “safe place.”
Investors are afraid of dead-end projects. Figure out how much money you’ll need to get to an operational “place of safety” –- a.k.a. the inflection point that gives your investors confidence that more money will be forthcoming, and on favorable terms. Examples might be: cash flow break-even; a deal with Google; revenue benchmark; or a patent award. Whatever it is, show that you can get to that “safe place” with $500,000, and people will get excited.

5. Don’t inflate your burn.
One way to make investors really comfortable is to keep your burn rate the same after you close your financing. Use your capital to pay for only those things that you cannot pay for with sweat equity. If you’ve been paid with sweat equity for six months, do it for six more, or at least long enough to show that you’re focused on getting to your “safe place.” If an entrepreneur came to me with this proposition, I’d know s/he was not just viewing the funding as a down payment on their payday.