Corporate & Securities Law

Angels Asking For Control

By Ryan Roberts

Occassionally, a startup will get a term sheet from an angel with a pre-money valuation less than the investment amount (i.e., the angel wants control of the startup). And “control” isn’t just defined as a majority of the shares of the company — if the angel asks for approval of all budgets & hires or for a board seat (and they would represent 1/2 of the board) they are still asking for control.

When this occurs, you need to determine the reason why your potential angel investor wants control. Is it based out of fear or corporate narcissism?

That is, you have to figure out whether your angel wants control because he or she doesn’t know any other way to protect the investment in your startup or because he or she believes they can run the startup better.

If the request for control is based on fear, the investor needs to either (a) not invest in your startup, or (b) get educated on various terms of an investment that could help protect their investment. This education could come from you or your lawyer, but preferably from the angel’s lawyer.

If the request for control is based on corporate narcissism, you probably need to find a new investor. Most angels have the ability to make an angel investment in your startup because they successfully managed/owned/exited a company or ten. And they probably started this when you were busy collecting Garbage Pail Kids. Thus, they likely you view as “not ready from primetime” and their future employee.

If the corporate narcissist angel’s background involves tech (or at least something similar to what your startup is implementing), then the control aspect can be somewhat tolerable…in the short run. But you never want to end up with an angel controlling your tech startup during the day, then calling you at night because he can’t get his iPad to work on his wifi network.

Investor fear is workable, but corporate narcissism is a deal breaker. At the end of the day, don’t give up control to any angel. And from my experience, the good angels don’t want it.

Full post as published by The Startup Lawyer on August 12, 2010 (boomark / email).