What type of Limited Company shares should you offer an Angel Investor?
By Venture Giant
There are several options for compensating an angel investor for their investment in your company. Most of the time, Angel investors are offered equity in the form of common shares and usually receive additional compensation, if the company is profitable, in the form of dividends. Once dividends are declared, they are paid to all common shareholders based on the number of shares each individual owns.
Preferred shares are another option that is also popular amongst angel investors. Dividends for Preferred shares do not fluctuate with the company's profitability but pay a predetermined percentage rate each year. The majority of angel investors want either of these types of equity in your company but most will expect common shares.
Debt financing is the least preferred option and is usually backed up by solid assets as security. Many start up or early stage businesses simply do not have the necessary security to guarantee the debt. In most cases they don't even have the cash flow to guarantee repayment at a set monthly amount.
There are other forms of compensation which are much more creative that may appeal to the right angel investor. An angel investor who is still active and experienced in your industry might want to be more involved in the business. They may participate in sales which could result in an inflated commission being paid to them based on the amount of their initial investment.
If the Angel Investor simply wants a cleaner way to be compensated vs. being part of the company as a shareholder, a royalty on all sales (or gross profit) might have added interest to the Angel Investor.
Equity (common shares or preferred shares)
If you wish to offer a business angel investor in return for their investment, equity in the form of common shares, remember that this is generally the preferred type of security for many angel investors.
The amount of shares you offer will be dependent on how the business is valuated and how much control you are willing to give up. It's also about the risk/reward ratio and this can be improved in the eyes of the Angel investor if they are convinced that there is a good solid management team that can achieve the projected targets in a reasonable time frame.
Debt financing (standard loan)
If you wish to offer a business angel investor in return for their investment, equity in the form of debt financing and this is part of your investment proposal that requires additional consideration.
Commission from sales/deals
If you wish to offer a business angel investor in return for their investment, equity in the form of commission from sales/deals and this is part of your investment proposal that requires additional consideration.
Royalties on sales or profits
If you wish to offer a business angel investor in return for their investment, equity in the form of royalties on sales or profits and this is part of your investment proposal that requires additional consideration.
Venture Giant Insider Edge:
Although there are many options available to you as an entrepreneur, consider starting with the traditional and offer common shares in the company in exchange for their investment. As things progress and if negotiations hit a roadblock, be prepared to introduce some alternative options.
Be creative and prepare a list, for your own reference, that prioritizes those options.
Venture Giant is a premier UK business Angel investment network and small to mid sized business networking portal that matches active business angel investors with entrepreneurs' seeking investment capital and business funding.
Written for and behalf of Venture Giant Enterprises Ltd. All rights reserved 2009
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