Understanding Angel Investors
Filed in archive Venture Capital by tj 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."
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