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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."
Permalink: Understanding Angel Investors
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