© David J. Litwiller, 2011 1

Cash, Connections and Chemistry

Top Entrepreneur and Angel Investor To-Dos when Joining Together for a Winning

Relationship in Early Stage Technology Ventures

Dave Litwiller

This article details high leverage activities at the time of angel investment. It considers the entrepreneur,

value-adding angel investor and jointly, addressing undertakings before and after investment that increase

the likelihood of forming a mutually beneficial long-term partnership in early stage technology ventures.

Emphasis is placed on actions beyond common rule-based checklists for investors and entrepreneurs at this

stage, to highlight preferred practices pre- and post-investment which help qualify and most contribute to

success of the relationship and investment.

Entrepreneur

First Impression, Near Term Roadmap, and Responsiveness. Much of the impression and visceral

comfort about the entrepreneur that the angel will base his investment decision on is established in the first

minutes of the first meeting. Come out of the gate strong. Deliver a practiced, concise pitch that has been

well reviewed and tested.

During the first meeting with the angel, lay out the roadmap for the business for the next two to four

months.1 This is the time window when investment discussions and negotiations typically take place.

Meet those operational, technical and market development milestones. Moreover, hit a few more that you

hadn’t promised over that time frame. Near-term predictability, tangible execution progress, and up-side

all form the proof points to help build investor confidence to bring an early stage investment across the

finish line.

During the second meeting with the angel, show that you are prepared, and have answers to everything that

was identified for follow-up detail or explanation at the first meeting. You’re exhibiting to the angel that

you’re a good listener, you are fast and responsive, and that you have a compatible communication style.

Undivided Attention at Term Sheet Time. Turn off all sources of interruption and distraction when

negotiating and evaluating a term sheet. Take time during the process to reflect and get advice.

There are many terms that are necessary to protect investors in a term sheet and subsequent shareholder

agreement. Many of the elements of traditional venture capital term sheets and shareholder agreements are

coming into those of angel investors. These mechanisms are necessarily complex and have significant

ramifications for founder and early employees’ entitlements to the ultimate proceeds from the business.

Model the distribution of proceeds under a range of liquidity scenarios. Pay attention especially to what

would happen in an early or modest valuation exit. With later round financiers typically expecting at least

as good terms as earlier round investors, the terms of an early angel round often have significant influence

over flexibility accessing downstream financing, and ongoing operating agility with the business.

Shareholder and debt holder agreements have much more inertia than many other corporate matters. Care

and calm consideration are essential at term sheet time for a good entrepreneur outcome.

In addition to undivided attention, this is not the time for inexperienced legal advice, if cheap or the most

readily accessible. Investment negotiations, term sheets and shareholder agreement drafting and review are

instances to pay up for seasoned legal counsel. The best lawyers for these purposes have typically advised

on dozens of past such agreements, and seen the life cycle ramifications of a multitude of terms and

1 “Mastering the VC Game”, Jeff Bussgang, Portfolio, 2010

© David J. Litwiller, 2011 2

negotiating postures. Most of all, the right counsellors have a reputation for business savvy in addition to

legal savvy in term sheets, shareholder agreements, new venture governance, and venture finance.

Explicit Liquidity Scenario Planning. Discussing and reaching a clear and shared sense with an

incoming investor of the likely time frame to exit, and a plausible range of liquidity scenarios for the

business, helps make sure that people are able to reach alignment with a pervasive force that will influence

the ongoing governance and management of the business.

Over time, liquidity ideas will nearly always evolve. Even so, the best way to assess if a group of people

are likely to be able to stay in sync about exit objectives is to unambiguously reach agreement about an

acceptable range of plausible outcomes prior to the onset of the relationship based on initial conditions.

Competition for the Deal, with Valuation Pragmatism. The valuation should signal confidence and

opportunity tempered for stage of development. Best from a valuation perspective is to show a functioning

prototype and customer traction prior to seeking angel investment, extraordinary people working in the

business, and a large target market with a sustainable edge and a scalable model. Doing so brings the best

chances for competitive angel interest to drive not only valuation but also flexibility with investment terms.

At the same time, there is a caution. A high valuation may be pleasing to the entrepreneur for the

validation it provides, and minimized dilution at the time of early stage outside investment. An ideal but

rare scenario even exists in which the angel who best knows the space, has the most vibrant network to add

value, and has a particularly favourable bias toward the entrepreneur, is willing to invest based on the

highest valuation. But, such conditions are exceptional with competing time demands for the entrepreneur

when fundraising. Usually, excessively high valuation carries outsized risk for increased dilution and loss

of control for the founder and early investors if there is turbulence down the line. Reduced future access to

capital can result.

A more moderate valuation typically provides access to a wider range of investors and investor

representatives to participate in the build-out and governance of the company, and less need for draconian

investment terms. A more modest valuation increases the odds of finding the right investor chemistry and

complementary skills. Often, when it comes to early stage business valuation, a little less at the start ends

up yielding more for the entrepreneur at the exit.

Willing to Share, and Even to Step Aside. The entrepreneur needs to be willing to share decision

authority with an incoming investor, especially on transformative issues. The entrepreneur also must

demonstrate self awareness of strengths and weaknesses, be willing to bring on help in his weaker areas,

and if conditions call for it in the future, to step aside. The obligations to shareholders and stakeholders

beyond the founder may come to demand it with outside investment, even if such a future inflection seems

a remote possibility at present.

Reverse Due Diligence. Do as much due diligence on a prospective angel as he does on you. Get to know

the investor to understand and test out how involved he intends to be, the value he can add beyond cash, the

buzz that surrounds him based on his track record, and, his rate of investment in other firms at the moment.

Check references. With the right investor, cash is only part of the contribution. The larger value comes

from: guidance at major transition points; personal network to originate deals and ecosystem relationships;

testimonial impact of his investment; and, leadership in syndication and follow-on financing.

Explore particularly to understand the double or even triple bottom line he may have for his investment in

terms of learning, networking, giving back to the community, and capturing more entrepreneurialism in his

business life. Especially if an angel invests or intends to invest with a view toward taking an executive role

with the business, rather than holding the line at being solely an investor, an even greater level of care than

other major hiring decision needs to be taken because of the complexity of extrication should the

employment arrangement not work out.

© David J. Litwiller, 2011 3

Angel Investor

Time, Guidance, Sounding Board and Networking. The advice and counsel that an angel provides to the

entrepreneur can be as much about the person as it is the business, given the multi-faceted challenges of

leading a high growth technology business. It takes time to do this well and regular candid contact through

ups and downs.

An angel typically adds the most value when he helps de-risk or accelerate the development of the market,

technology, and operational execution in areas where the entrepreneur and senior management team may

not be as strong. An experienced sense to pick up on the likely soft spots in the entrepreneur’s strategic and

financial model, in order to tighten them up, activates the value of an investment greatly compared with

learning things the slow, hard way. Angel time availability to help out most at turning points or moments

of turmoil for the business is paramount to add value. Angel value add is also high when syndicating an

investment round, by the lead angel bringing the right group of other angels together for the deal rather than

the operating management having to take time out to do so. Furthermore, helping management to scenario

plan for some of the more likely pivots the business may encounter enhances the confidence and agility to

take new headings when conditions call for doing so. As companies mature, angel ability to source interest

and competition for M&A exits also generates significant returns compared to most other effort

investments during the company’s development.

Over time, the quality of an angel investor’s deal flow will be determined by how well he helps build

companies through personal networking to facilitate partnerships, key hires, and follow-on financing. The

reputation for doing so well brings better entrepreneurs and ideas to the angel in the future.

Capital Reserve. The ability to keep up ownership percentages in winning portfolio companies during

subsequent financing rounds enables the angel to realize the full value of his investment. As well, the

advantages in speed, control and conservation of management time from being able to provide additional

financing through an inside round frequently have a strong bearing on success to get the business through

near-term turbulence, rather than having to access outside financing to power through minor setbacks.

IP Management and Protection. Survival and later stage funding success statistics both correlate

significantly with early IP protection measures. The risk of IP ownership and infringement claims rise

disproportionately for those early stage companies that go on to much greater scale. At the same time, it is

often difficult to retroactively apply effective IP protection measures covering earlier groundbreaking work.

With a strong disproportion of angel investor returns concentrated in a minority of hyper-successful

investments, sufficient funding and attention needs to be paid to IP protection from an early stage in order

to maximize outcomes. A strong IP portfolio also provides greater monetization flexibility for investee

businesses, enhancing liquidity options.

Particularly at the present time with the popularity of lean start-up models, a blending often occurs of

employees’ personal resources with those of the company absent a clear mandate for company ownership

and control of IP. Angel investors are usually well served to encourage management to have distinct

company ownership and repository of important IP, including items such as source code and design files,

configuration management, invention notebooks and disclosures, invention assignment agreements,

confidentiality agreements, and employment agreements, as well as supplier, customer, and partner

relationship information.

Both Entrepreneur and Angel

Rapport and Mentorship. The mentor-mentee role at the start between investor and investee gives way

quickly to mutual mentorship as a good relationship develops. The capacity to evolve to peerage needs to

be evident during the investment qualification process based on mutual respect, communicating clearly,

listening, sufficient similarity in personality traits, and a track record on each side to be persuasive to the

© David J. Litwiller, 2011 4

other. At the same time, more robust strategies and execution come from enough relevant diversity to

expand the range of thinking from the combination of minds beyond what either would have come up with

alone. The idea for the business will morph. To thrive throughout, a great interpersonal dynamic needs to

be the bedrock for the entrepreneur and an involved angel.

The big six dimensions of personality variation between people can be a helpful framework for investor

and entrepreneur to assess fit, rapport and likelihood to achieve mutual mentorship. This can be done

through a gauged degree of similarity and diversity in:2

• Openness to experience, including curiosity, novelty seeking, interest in cultures and aesthetics,

individualism and liberalism

• Conscientiousness, as evidenced by self-control, willpower, reliability, consistency,

trustworthiness, and focus on long-term goals

• Extraversion, being friendly, gregarious, talkative, funny, expressive, assertive, active, excitement

seeking, and socially self-confident, or even more pronounced forms of power displays and

dominance

• Agreeableness, such as warmth, kindness, empathy, compliance, and modesty

• Emotional stability in the form of adaptability, equanimity, maturity, stress resistance, optimism,

calmness, and speed rebounding from setbacks

• Intelligence

These trait profiles will tend to come out over the course of a sufficiently wide ranging discussion about the

prospects for the business. Throughout the dialog, both should be on the lookout for compatibility and

catalysis of thinking styles, ways of working, enthusiasm for the business, and a shared view of the future.

A quick test to make sure that joint enthusiasm isn’t overlooking major latent disparities is to scenario plan

for how the business, entrepreneur and investor would respond under the conditions of a threatening

setback. Consideration of prospective events and reactions are illuminating for this purpose such as slower

ramping revenue than planned, weaker margins, development milestone push-outs, departure of a key

manager, or need for significant additional downstream financing that is well beyond current plans.

Such internal investigations about personality and style should be augmented with external discovery from

colleagues each has worked with in the past. More extreme behaviours can go undetected during initial

interactions which are evident to those who have logged more time and under a greater range of demanding

circumstances with the entrepreneur and angel.

All said, exploring interpersonal chemistry beyond cursory impressions, and under both challenging and

fulfilling scenarios, will help to assess the compatibility of people and opportunity.

About the Author

David J. Litwiller is a senior executive in high technology, based in Waterloo, Ontario. His background is in

wireless devices, precision electro-mechanics, semiconductors, electro-optics, MEMS, biotech instrumentation,

and enterprise software. He serves as an advisor for various private corporations in matters of strategy,

technology, operations, and business development. Mr. Litwiller is the author of “Rapid Advance - Mergers &

Acquisitions, Partnerships, Restructurings, Turnarounds and Divestitures in High Technology”.

http://www.amazon.com/Rapid-Advance-Acquisitions-Partnerships-

Restructurings/dp/1439200874/ref=sr_1_1?ie=UTF8&s=books&qid=1287516364&sr=1-1.

2 “Spent” Geoffrey Miller, Viking, USA, 2009