Angel investing on the cheap
Earlier this year, I invested in a startup. A side-effect of this is that I get a lot of people asking me what term sheet I used or what law firm I got to draw up the deal.
The fact of the matter is that I didn’t use a term sheet template nor did I take any legal advice. I did ask a lawyer friend of mine how much his firm would charge to handle an angel investment. He said it would be at least £1,000. I decided that, given the investment was relatively small, I didn’t want to incur a comparatively large (as a proportion of the investment) legal bill.
So, the startup and I thrashed out an investment agreement over the course of a couple of days, going back and forth on email and by phone, borrowing bits and pieces of terminology from various documents we found online. Eventually, when we were both happy, we met up (in a pub, natch) to formally sign the agreement.
Now, I’m sure that any half-competent lawyer could poke it full of embarrassing holes but that’s something we accepted at the outset. From my perspective, I’m about to give thousands of pounds to these guys. That implies a certain level of trust up front. It also implies a certain acceptance of risk (let’s face it, if I was risk-averse, I wouldn’t be investing in a startup in the first place).
So, in the interest of demonstrating to other prospective angels that investing in a startup needn’t involve spending hundreds of pounds on legal fees (and at the risk of some smart-ass lawyer – qualified, amateur or wannabe – making me look like a fool), I present a redacted version of the investment agreement between the startup and I.
I deliberately did not opt for a convertible loan, anti-dilution provisions, extra options, preference shares, the right to participate in future rounds or anything fancy like that because (a) I wanted to ensure that the investment would qualify under the Enterprise Investment Scheme and (b) I didn’t want to complicate or put any obstacles in the path of future investment rounds. The whole rationale behind making an angel investment is that you’re providing funding to allow the founders to develop the idea to the stage where they can attract the next round of funding. You don’t want to do anything that might complicate or jeopardise that process, which is why I kept things simple.