An angel investor is one of multiple individuals or entities that fund startup enterprises. The role of an angel investor in a startup, beyond the initial funding, is not necessarily straightforward.
An angel investor does not necessarily get a board seat for investing in a startup. Whether or not an angel investor gets a board seat as an Investor Director depends upon whether they want a seat and whether the startup wants to offer a seat.
What it means for an angel investor to have a board seat is important to know, as is when it’s pertinent to offer an angel investor a board seat.
What Does It Mean for an Angel Investor to Have a Board Seat?
First of all, it’s important to establish what a board of directors is.
Every company is legally required to have a board, even if that board consists of only one person. As for the duties of the board, according to TechCrunch,
“The board will ultimately be responsible for making the critical decisions for the company, like whether to raise money, whether to be acquired, whether to enter into important strategic transactions and whether to hire or fire senior management. So make no mistake — who sits on the board is critical.”
In other words, the board makes all of the major decisions for the company.
And, according to Steve Blank at Forbes, “your board is not your friend.” The board can better be understood as “your boss,” as whoever is on the board has a vote in whatever the company does, including whether or not to fire any member of the board.
So, if a startup decides to give an angel investor a board seat, they’re essentially handing over a lot of power to this individual. For that reason, the decision of whether or not to allow an angel investor on the board is a major one.
Why Would an Angel Investor Want a Board Seat?
First, let’s establish what exactly an angel investor is.
Angel investors are individuals who invest in startups and new small businesses in return for equity in the company, typically 25%. They tend to be independently wealthy and invest at an early stage.
There are many reasons why an angel investor might want a board seat.
For one thing, the more an angel investor invests, the more they have at stake when it comes to whether or not the startup fails or succeeds. For this reason, angel investors who invest a lot may want more say in what decisions the company makes.
In addition, the angel investor may have a genuine interest in helping the company to run smoothly and succeed. Instead of being “passive,” writes Anthony Rose at SeedLegals, angel investors “represent a collective force that can help your business in terms of expertise and network as investors or entrepreneurs themselves.”
So, an angel investor’s interest in being on the board may not simply exist for financial reasons but arise from a genuine interest in the business.
When Should a Startup Offer an Angel Investor a Board Seat?
According to Business News Daily, angel investors tend to invest less money than venture capitalists do, and rarely make a board seat a condition of their investment. Writes Rebecca Renner, “This makes them an attractive funding option for startups that don’t need large investments and want to retain more control over their business.”
If you have a startup business for which you’re not looking for a large amount of money, and you want more control over your business, then it may make sense for you and your company to not give angel investors board seats.
However, as previously mentioned, if an angel investor does invest a large amount of money, they may want more say in the company’s decisions.
In the case that your startup business needs a lot of capital to move forward, and an angel investor offers that large sum that you need, it may make sense to offer them a seat on the board if they request one.
Is There an Alternative to Giving an Angel Investor a Board Seat?
Besides offering an only equity ownership interest in exchange for funding, a startup can also offer a board Observer position to an angel investor, instead of a board seat.
While a board Observer can’t vote on board decisions, they are able to sit in on board meetings and contribute to discussions. This way, they can know what’s going on and have their voice heard, but the founders of the startup will retain more power over decision-making.
Making an angel investor a board Observer may be a good idea if the angel investor will accept that position over a board position, and especially if you believe the angel investor has an invaluable perspective to share with your company.
Alternatively, you could establish an advisory board and appoint an angel investor to that board. Unlike a board of directors, an advisory board is not a legal entity, and therefore a member of an advisory board doesn’t have the same power that a member of a board of directors does.
By putting an angel investor on an advisory board, you can get the benefit of their good advice and experience to share, without relinquishing control and power over the startup.
Advantages and Disadvantages of Having an Angel Investor
There are some advantages and disadvantages of having an angel investor for your startup or new small business.
Advantages
For one thing, because angel investors fund new businesses with their own money in return for equity in the company, there’s no debt to repay. In the event that the business goes south, the angel investor takes that as a loss.
In addition, angel investors represent a valuable source of experience and wisdom to draw upon. Especially if they want to become a member of an advisory board, they can offer invaluable insight to the startup.
Plus, according to eFinance Management, “Angel-funded firms are likely to survive at least four years and raise additional financing,” and angel-funded firms also create jobs and generate wealth.
Disadvantages
There are also several disadvantages to having an angel investor.
First, because angel investors trade their money for equity, that means future profits will be limited. For instance, if you give an angel investor 25% equity, then a quarter of every $1 earned will go in their pockets.
In addition, angel investors tend not to invest multiple times, instead investing only once in the early stages of the startup, limiting the benefit of any single angel investor.
Plus, startups and new small businesses lose some control over their companies when taking on an angel investor, especially if the investor insists upon a board seat.
Lastly, it’s often hard to find worthwhile angel investors. Some are only in it for the money, meaning they have little to offer in the way of advice, insight, and long-term value. It’s important to differentiate between investors who are interested in seeing the business grow and those who simply care because of their return on investment.
As we’ve learned, a startup or small business that an angel investor funds does not necessarily have to give the investor a board seat. Instead, angel investors can enjoy a board Observer position or a place on an advisory board. Whether or not a startup offers an angel investor a board seat is up to the founders and depends upon a variety of factors.
Sources
https://techcrunch.com/2016/11/05/what-you-need-to-know-about-startup-boards/
https://www.forbes.com/sites/steveblank/2013/07/09/dont-give-away-your-board-seats/#5126f5a94530
https://www.businessnewsdaily.com/9078-angel-investor-funding-reasons.html
https://efinancemanagement.com/sources-of-finance/angel-investors
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