Preparing for Financial Salvation

Angels are often defined as "spiritual beings." To the entrepreneur seeking a sizable cash infusion, angel investors might well seem heaven-sent. In addition to money, they typically offer value-added benefits such as expertise, experience, mentorship, creative ideas and contacts. But they are not necessarily endowed with the patience of saints. That's why it's crucial to be prepared to attract angel investors to your venture and to ensure a smooth relationship once you have reached a deal.

Here's what your plan for financial salvation should include:

1. A solid business plan. The days of the concept sketch on the back of a cocktail napkin are long gone. Yes, investors are greater risk-takers than Grandma Sophie, whose portfolio consists of triple tax-free municipal bonds, but their risk-taking is calculated, not reckless. Be crystal clear about why you need the financing (and how it will be spent), the competitive advantages and threats in your industry, your financial plan (such as tax returns, profit-and-loss forecasts, pro forma cash-flow analysis and balance sheets and five-year projections), and proposed company offering (desired financing, securities offering, capitalization, timetable). The marketing section may be the most fun for you to write, but angels will focus on the financial section.

2. A savvy management or advisory team. Investors don't expect every business owner to be an expert, but at least someone on your team should have had prior experience in your industry. Therefore, consider carefully your own background and experience as well as that of other potential active owners or advisory board members. Don't choose your best friend for your advisory board just because she's supportive; seek out people who have gone where you want to go. Make sure you have the right professional advisors on your side. Include advisors who understand the ins and outs of raising angel capital, because the tax and legal issues can become complicated.

3. A wise choice of angels. Not every potential investor is the right person to invest in your business. Do your due diligence. That way, you'll not only focus on investors who are a better fit, you won't waste time trying to court people who have only a marginal interest in your business or those who can't handle the risk. You'll want to know:

• Is the angel is an "accredited" investor (defined by the SEC as someone with a net worth of at least $1 million or an annual salary of at least $200,000).In other words, can the investor reasonably and comfortably take the hit if the investment goes down the toilet?
• Does the angel have prior experience in your industry? • Does he or she tend to fund deals at the size and stage your company is in?
• Is he or she geographically convenient for attending in-person meetings (some investors like to take a more hands-on role)?
• What added value (in addition to the money) can the angel bring to your venture? Does he or she have connections to other investors and contacts for business growth?

4. An understanding of angels' expectations. Different investors have different styles of involvement with the companies they invest in, and this should be reflected in both the legal documentation you sign with them and your way of communicating with them. Your understanding should include:

• Do the angel want a board position? Would he or she prefer a consulting role?
• How frequently does he or she want to hear from you?
• What information does the angel want to see when you do contact him or her (what kinds of reports and in what form)?
• What is the angels' exit strategy, both in terms of time to devote to the company and return on investment?
• How large a stake does the angel want in the business?
• Will he or she be expected to contribute capital for further rounds of financing?
• Will he or she demand the right to advance approval for certain actions, such as taking on other investors, adding additional classes of stock or taking any other actions that might dilute the value of his or her investment?

5. Generous use of your own money. Many entrepreneurs salivate at the prospect of using bushels of other people's money (OPM) while contributing just the sweat equity. That's not realistic. Be prepared to put your own money (YOM) on the line. It's a sign of your confidence in the success of your business model. If you're not willing to do so, you'll be hard-pressed to find an angel investor who will. The same goes for offering stock in lieu of cash or a back-end success fee to your professional advisors.