Stybel Peabody & Associates

QUESTIONS BOARD MEMBERS SHOULD ASK ABOUT ANGEL FINANCING STRATEGIES

“Angel financing” is often the first round of financing for early-stage companies. Angels are typically wealthy individuals who allocate a small part of their net worth to investments in high risk/high reward early stage businesses or businesses which are more mature but have smaller capital needs than more traditional venture capital deals.

For the entrepreneur, angel financing often provides the critical first funds needed to attract key employees and to develop a technology or a product to the point of commercialization or to a stage where more significant venture capital funding becomes available. Angels operate in a number of ways, sometimes through groups of pooled funds or individually. Angels are even available now through Internet links and networks.

Typically, angel investors are those individuals who know the entrepreneur from a family or business relationship or understand the business, either through the angel’s own business experience or through prior investments. Most angels as a group invest up to $1,000,000 (although often less).

Over the past several years, liberalization of certain securities laws and the stock market boom have resulted in increasing levels of angel financing. Under Rule 504 of Regulation D of the federal securities laws, investors purchasing up to the first $1,000,000 in stock in a private company in a 12 month period may typically resell their shares following an IPO without regard to the holding periods imposed under Rule 144. In the past, investors had to wait two years or more following their investment before they could resell under Rule 144.

An entrepreneur considering raising equity through an angel financing should consider the following in structuring a deal with angels:

Structured correctly, angel financing can provide not only needed capital but momentum to an early stage venture, allowing the company to grow and raise additional equity to propel its growth into the future. As in all stages of financing, entrepreneurs should work with advisors who have the experience necessary to assist the entrepreneur regarding the mix of contract rights and restrictions appropriate to the particular circumstances.

Neil H. Aronson, Partner in the Technology Group at Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. Boston, MA tel. 617/348-1809

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