When structuring the terms of an investment there are generally two sides: structure is essential or structure is irrelevant (Winning Angels). There seems to be a clear divide between the role of structuring a deal. Some investors know exactly what structure they want in an investment deal and will often not move forward if it does not align with what the entrepreneur is proposing. However, there are other investors who feel the structure doesn’t necessarily matter if the startup becomes really successful or fails.
If the investor and entrepreneur can agree that the structure of the deal doesn’t necessarily matter in the beginning then I see this as a win-win. Yet it doesn't always work out this way. The book, Winning Angels, brings up some great points to think about the investor and startup are discussing structure.
Keep it simple - Lucius Cary, an angel investor, states in the book, Winning Angels, that "it should be possible to get the entire agreement on one page". George Kline, also an angel investor, agrees and says, "I prefer a simple structure".
Align interest - In order for any relationship to work both parties need to have an understanding of each one's interest and whether or not they are similar. For instance, if two people are dating and one wants a commitment while the other doesn't want to be serious then the relationship will most likely not last long.
Get cash early whenever possible - Investors are looking to get their money back early. There will be less tension on the relationship between the investor and entrepreneur the sooner the startup is able to pay back some of the investment.
Focus on the entrepreneur during evaluation - I believe this is a great point. The entrepreneur is in the driver seat when it comes to the startup. The entrepreneur wants the startup to succeed more than anyone which only seems fitting that they should be the focus.
Get pre-emptive rights - This is a common, and in my opinion fair, practice that allows the investor to invest more capital in future rounds to maintain their ownership.
Leave it to the lead - This goes back to focusing on the entrepreneur. They have worked hard to determine the costs and projections of the startup and has a good idea on price already.
Limit conflicts - The underlying theme is that it is a relationship between the investor and the entrepreneur. With any relationship, it is wise to limit the conflicts between each person. Each person should look for common ground and ways to help one another agree on problems that may arise.
If both the investor and the startup decide to structure the investment deal then a term sheet could be a critical tool. A term sheet is simply a document stating the basic terms and conditions of the investment deal. The relationship between the investor and entrepreneur is extremely important. It makes since to begin the relationship on common ground where the terms of the deal are defined and everyone is one the same page. Dan Rosen, CEO Dan Rosen & Associates, has created a model angel term sheet for investors and entrepreneurs alike to use as a resource.
Amis, David, and Howard Stevenson. Winning Angels: The Seven Fundamentals of Early-Stage Investing. London: Pearson Education Limited, 2001. Print.