Choose Your Angels (and Lawyers) Wisely

One unfortunate result of the boom in angel/seed investing is that a lot of wealthy people who don’t have a clue about tech investing have started entering the space.  Trust me, in Texas there are a lot of folks with deep pockets who think that “iPhone” is an action.  In some sense, money is money and a lot of angels aren’t expected to be the kind of value-add that you might see more from an institutional investor.  But yoking yourself to someone who has been quite successful in life (and knows it), but doesn’t quite understand the big picture of angel investing, can create massive headaches.

In the past several months I’ve encountered angel investors demanding things like completely non-dilutable shares, dividends paid out on an annual basis, and overall pointless tinkering with contract provisions that not only makes little sense in the startup context, but will almost certainly have to be reversed in later funding rounds; assuming they don’t prevent such rounds altogether.

A founder may think that she has an advantage in going with unseasoned “dumb” money, but be careful.  Most people don’t build the kind of capital needed to be angel investors by sitting passively, abiding by the advice of legal counsel.  All those phone calls and back-and-forth with attorneys over pointless issues will add up on the legal bill.  An even scarier situation is when you have not only an inexperienced investor, but that investor’s lawyer also doesn’t do much startup work.  Run.

In these situations, the people skills of your attorneys can be extremely important, and save you money.  The profession is full of egomaniacs who will argue a point just for the sake of arguing, notwithstanding the cost to their clients.  You want representation that not only has the knowledge base to draw from, but can articulate it in a manner that educates the other side, without letting discussions become combative.