Finding the right angel investor for seed funding

Nina L. Kaufman, Esq.

An award-winning small business attorney in New York City, Nina is a sought-after professional speaker and Entrepreneur Magazine online contributor. She is the go-to counsel for knowledge economy and creative companies, delivering legal services and educational resources that save them time, money, and aggravation.

Posted on October 20, 2020 in Money & Finance

Investors may seem like guardian angels, but they are definitely worth investigating when you’re seeking seed funding. Expectations run high in relationships where seed funding is involved. Therefore, invest the time to ensure that that your “too-good-to-be-true” angel investor really is just that:

1. Do a reference check. Although angel investors may come through referrals, be sure to delve into their backgrounds. Make sure that there are no red flags like criminal records, bankruptcies, or multiple lawsuits. Also look for inconsistencies in the data you receive.

2. Run a “personality test”. Some angel investors want a good finanical return on the seed funding they provide; others seek status; some genuinely like your industry. Listen carefully to the questions asked. What role does he claim to want to play? Does he have a personality you can enjoy working with? Or does he come across as a micromanaging nightmare?

3. Clarify roles, duties and expectations. Strike a fair balance between giving your angel investor comfort that her seed funding is well invested and giving you the freedom to keep running the business. How often does the angel investor have the right to see financial reports? May the angel investor participate in the day-to-day management of the business? Put it all in writing; don’t rely on memory alone.

4. Avoid “ostrich” syndrome. It’s tough to confront someone who has just given your business a significant cash infusion of seed funding. When things go awry – such as in the case of a busy-body investor – have that difficult conversation immediately, so that bad patterns do not become engrained.

5. Don’t go it alone. Taking on an angel investor is a momentous decision. Assemble a good team to handle the details you may not have considered. This includes the background/due diligence checking, accounting, and legal help.

Engaging an angel investor who’s a bad fit can set back your business goals and finances. Invest the time in the investor so that you make the right choice for your seed funding sources.

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