Understanding Angel Investors

Filed in archive Venture Capital on April 22, 2005

Dispatches has a long and very thoughtful post about motives and incentives for Angel investors:

• "Angel investors have a propensity to trust, but most often
  don't have the experiential basis to have a high degree of trust with
  entrepreneurs at the outset. Consequently, the validation of an
  entrepreneur's trustworthiness by a third party is important.



• Notwithstanding the factors that inhibit complete
  contracting at the early stages of a venture, a key value of
  negotiating investment documents may derive from the ensuing
  alignment of expectations and the clarification of roles.


• Investors tend toward a "trust but verify" posture.
  Consequently, investment contracts tend to reduce obvious sources of
  agency risk (e.g., the company's ability to engage in acquisitions,
  divestitures, and issue debt and equity; non-compete clauses) and
  construct appropriate incentives (e.g., future funding contingent upon
  meeting performance benchmarks; equity linked compensation).
  
  Furthermore, investors do care about geographic proximity and social
  affinity - factors that influence the opportunity for the frequent
  interactions that will confirm or disconfirm the trustworthiness of the
  entrepreneur over time."