Everything You Need to Know About Angel Investor Terms

Angel investor jargon refers to the connection that exists between an investor and the firm that receives the investment.

Angel investor jargon refers to the connection that exists between an investor and the firm that receives the investment. The conditions of this form of agreement are set via the use of a non-binding document known as a term sheet. This is similar to a letter of intent in that it establishes the intention to proceed with a partnership and often leads to a legally binding agreement.

What Information Is Included on a Term Sheet?

An angel investor’s term sheet is typically 10 pages long, but a venture capital term sheet might be 20 pages or more. These pages explain the proposed conditions of the contract and may be used to attract prospective investors as well as a guide for lawyers in creating the legally enforceable investment agreement.

Because term sheets can include sophisticated legal jargon, persons with little legal expertise should seek the advice of an attorney. A term sheet’s features include anti-dilution safeguards, drag-along rights, liquidation preferences, board composition, investment round size, and share price. Consider the following factors:

The arrangement must be lucrative enough for the investor to warrant taking on the related risk. The investor want to minimise dilution and get a quick return on their investment.

Investors aim to avoid clauses that enable future transactions to depreciate their investment or cause them to lose liquidity priority.

Some investors may want some control over the firm, including a say in key decisions.

Investors will want to guarantee that their money is returned in both good and negative investing circumstances.

The term sheet should be written in such a manner that the contract benefits both sides.

What Exactly Is Seed Capital?

Seed money is the original financial source for a new firm, and is often contributed by the company’s founder and his or her friends and family. This is known as the seed stage, and it happens before to any large investment rounds. Frequently, the firm in issue is not yet profitable or is just making a modest amount of money. The seed stage aids in the development of the firm and piques the attention of venture investors.

What Is the Value of a Startup?

The worth of a new firm is determined by the price that someone else would be ready to pay for it on the open market. Valuation types include:

Pre-money valuation refers to the value of a company before an angel investor invests money in it.

Post-money valuation refers to the value of your company after receiving a cash injection from an angel investor.

Before each round of investment, a company is valued. Entrepreneurs often accept a lower price per share in return for more freedom.

What Is the Process of Stock Holdings?

Your corporation may issue a variety of stock classes, each with its unique set of rights. Preferred stock, for example, may be granted to investors and permits them to collect dividends before regular shareholders. Employees and founders are often granted common stock.

A capitalization table is a thorough list of stock ownership by person and business. It specifies each owner’s ownership percentages, which must total up to 100 percent. Consider the capitalization table to be a kind of spreadsheet.

Owners earn their stock holdings via a process known as vesting. This gives the company’s original founders and owners an incentive to remain. Vesting periods for founders and workers are typically three to four years. If the employee departs before the vesting term is completed, the firm will get a share of the stock.

Dilution occurs when you offer another person or firm a portion of your company’s equity. You now own a smaller portion of the corporation in order to create place for another owner.

A convertible note is when your firm accepts a loan that may be repaid with shares. This loan has a maturity date and an interest rate; it is often convertible at a discounted rate in the future.

Frequently, an investor may demand that a particular amount of stock shares be committed to future workers through a stock option pool. This also reduces your ownership share, which may vary between 5 and 20 points of equity depending on the arrangement.