If you are looking for an investor and decide to work with a group or an individual angel investor you need to know what they are likely to propose for a deal structure. If you are a working with an experienced angel investor it is very likely you will find terms such as:

Board of Directors – the Board will comprise of five members. One is the CEO, one a nominee of the angel investor, and three nominees that are independent of management which everyone agrees on and who will have a meaningful investment in the company.

Share and Option Vesting – Angel investors may ask the entrepreneur who started the company and is looking for investors to roll back their shares previously issued in the business and earn them over time. A typical framework would look like this: 50% of the shares will vest daily over a three year period and the other 50% will not vest unless and until there is a sale of the company.

Sale of the Company – There will likely be a “drag-along” clause which allows owners of 51% of the business to force the sale and drag-along the remaining 49%.

Convertible Debt – The ability for the investor to provide a loan with interest only payments over a period of 1 to 2 years as well as the option to convert debt to equity at their choice.

Legal Fees - The company will pay the legal fees to structure the deal.

As you look for investors in your company keep in mind there are plenty of ways to structure a deal. The deal structure points above are simply examples of what some investors are using today.

I would highly suggest asking any investor you are working with for a one page term sheet spelling out their requirements before you go too far down the path of having them invest in your business. Remember, it’s not the amount they will invest, but the terms of the investment that really matter.

David Gass
Founder, Business Credit Services, Inc.
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