Are you interested in becoming an angel investor? It’s not just about money. Investors sometimes also need to need expert advice to prevent mistakes and sometimes need to have a network of industry contacts who will help negotiate key “strategic partner” alliances. Therefore, the money you invest is not really important either. You will need to review the company’s organizational documents to see what rights you will and will not have as an investor.
Voting vs. Share
Voting Generally, angel investors own shares without voting rights in a company, unless they buy a large part of the company. Shareholders who do not have voting rights have few rights. However, shareholders who have voting rights may not have the right to impose obligations on shareholders who do not have voting rights, without their consent.
Ensure that the company’s organizational documents give owners who do not have veto power “veto power” over decisions that affect them.
Investment protection
When new investors put money into the company, your percentage ownership in the company will shrink. Maybe you don’t mind the dilution. But you need to consider two ways to protect against unfair disbursement of investments. The first example is the anti-dilution provision. In this case, the company must issue additional shares to you to maintain a percentage of ownership, if the company raises capital in the future at a lower share price than you paid. While the second is the right to pre-emptive securities. In this case, you will gain the right to purchase additional shares in any future offerings, at the same price per share that the new investor pays.
Stock protection
Most startup documents give the company a “right of first refusal” to buy your stock if you die, have a disability, leave the relationship or simply want to sell your stock to someone else. This is necessary for small businesses hoping to be managed by their owners in the future.
Seats on the board of directors
Having a seat on the board means you can look over management’s shoulders, mediate disputes and are very likely to be sued if something goes wrong.
Non-compete obligations
As both an investor and a consultant to the company’s founders, you will be dealing with a lot of confidential information about the company. Then, non-competing obligations can be another matter. Maybe you want to invest in another company in the same industry or want to do outside business with a company that has a relationship with your startup. However, there are many startup documents that contain nonsolicitation and noncompete clauses that can prevent you from doing so.