Can Venture Capitalist and Angel Investors live in the same space?
The structuring reading attempts to answer this question with 6 different important points.
Valuation- This seems to be a big point of contention between Angels and Venture Capitalist. When the entrepreneur sets the price there can be some skewed valuation. This made me think of a friend that launched a greeting card business called The Black Card babes. The line of greeting cards are geared towards African Americans, similar to The Hallmark Line Mahogany. Me being an Angel investor with personal ties to the entrepreneur I agreed to the pricing without really focusing on the market as a venture capitalist would. Now of course, I am speaking in much smaller terms but even with larger companies this a problem and A remedy to this is to offer discounts during the angel round so that angel will be much supportive of VC pricing in their round.
Efficient Corporate Action- This can best be explained as not having too many cooks in the kitchen. I tend to really side with the Angel Investors on this note. If I am investing a large amount of capital in a company in turn I would like a say so (voting rights) in any material changes. However, Venture Capitalist want to really limit approval from many investors unless it is legally required.
Simplicity- This request means exactly that. Venture capitalist want Angels to keep it simple and not get in their way when it comes their turn to invest.
Board of Directors- Many of the board of director seats are determined by the investment that the member made. Venture Capitalist don’t want to see the same members keep their seats after financing or the VC round due to a personal connection with Entrepreneur or a promise.
Compensation – Now this was a particular point that I really appreciated. The author advises “cash compensation should not require or enable the entrepreneur to change his lifestyle positively of negatively.” I believe we all have seen countless times were Entrepreneurs receive cash from an investor and the next day they are living the lifestyle of the rich and the famous. Venture Capitalist want to see sensible compensation.
Founder Stock – Venture Capitalist don’t want Entrepreneurs or founders basically taking the money and running. This particular tip reminded me of the student assistance guidelines at my job. My company will pay for or contribute to advanced degrees but there are some stipulations. I must work and additional 5 years after obtaining my degree and If I chose to leave the company or I am terminated then I must repay the company. Venture Capitalist want protections as well if a founder decides to leave the company.