ANGELS

Angels are high-net-worth individual who invests in private companies. These people are "accredited" investors, who, according to SEC guidelines, must have a net worth of at least $1M or earn >$200K annually. The typical angel invests between $25K and $100K at a time in one company, with an average of ~$60K per deal. Most angels have invested in several companies each year for over a decade. Angels will occasionally form networks or groups that may meet regularly to review companies.

Consult your corporate attorney prior to accepting money from angels. It may be advisable to have the attorney put together a Private Placement Memorandum (PPM), which is a more detailed version of the business plan with many legal warnings about the specific and general risks of investing in the company. By essentially stating, "Buyer beware: Invest at your own risk", a PPM mitigates the risk of an angel successfully suing the company for fraud.

THE 3 F'S

Inexperienced angels may fall under one of the 3 F's... friends, family, and fools. They may be doctors or lawyers who are willing to give "dumb" (silent) money but do not have enough relevant experience to contribute advice or connections. Worst case, such investors are meddlesome and fickle, insisting that they have a right to make management decisions or running away with their money when they discover just how difficult starting a company can be.

Angels may demand protective provisions that transfer risk to the company or other investors. Accepting their investments on bad terms (such as aggressive anti-dilution clauses) can make it difficult to raise money later. As always, consult an attorney before signing any agreements.

The best angels to have as investors are those who have started their own companies in the past in your industry and can give you valuable guidance (a.k.a. "smart" money). They can help you recruit people, raise more money from venture capitalists, identify customers, and prepare for business development negotiations. However, because these angels have done it before, they may feel that they know how to do it again even better than you. Be careful that they do not try to take over and run the show. One entrepreneur reported that an angel investor proclaimed himself the Head of Business Development and promptly screwed up both a licensing negotiation and frightened off several venture capitalists with his aggressive tactics.

Scientific advisor and Board of Directors may also qualify as angels. In fact, those members who truly believe in the success of your startup may consider investing, and some companies require that a new Director invest in the company as a show of faith.

MEETING ANGELS

As with most investors, angels prefer to hear about startups from their trusted sources; your corporate attorney, technology licensing office, or advisors should be able to introduce you to angels and other investors. Networking is important for finding and developing these connections. Attend meetings of the MIT

Entrepreneurship Forum (www.mitforumcambridge.org), which has 11 chapters in the US and a few in other countries. Go to investor conferences sponsored by industry organizations such as the Mass Biotech Council (www.massbio.org) and BIO (www.bio.org).

SMALL INVESTMENTS

Gathering the $2M-$5M that most biotechnology startups need in their first few years can be difficult when the average angel only invests $60K/deal. Even angel groups usually cannot collect more than $1M. Angel financing is most practical when the entrepreneur needs <$500K and can then raise more significant investments from venture capitalists later. Even such a small amount of money, by biotech standards, can increase your venture's credibility. $500K may be enough to secure an office, CEO, license agreement, and advisors.

ANGELS AS MENTORS

Many experienced angels not only profit from startup investing, they also enjoy it. They report that they want to give back to the entrepreneurial community from which they came. Recognizing that someone once took a chance on them, these angels are willing to overlook inexperience if a promising entrepreneur is pleasant to work with and demonstrates a willingness to receive guidance. Therefore, when approaching an angel, discuss how their contribution of experience (not just money) could make the company stronger.

An angel does not have to answer to anyone when making an investment and may be less concerned with an exit strategy than a venture capitalist. Consequently, an angel may be more willing to work with you to grow your company into a successful long-term business. In the event of crisis, a venture capitalist may exercise his right to replace the CEO whereas an angel may be more forgiving and allow the CEO to work through the problems.

ANGEL GROUPS

Angel groups tend to be local associations of angels who meet regularly to hear entrepreneurs pitch their ideas and to discuss investment opportunities. In most cases, an individual member will pre-screen a startup on behalf of the group. Each angel in the group decides independently whether to invest in a particular deal and can be an active or passive investor. Your corporate attorney or investors may know of angel groups in your area.

ONLINE MATCHING SERVICES & BROKERS

During the dot-com boom, a number of online matching services emerged promising to connect startups with angels. Some services pre-screen the plans before posting them. Most of the deals posted on these sites are related to information technology (IT); for the most part, neither the services nor the investors are sophisticated enough to evaluate biotechnology ventures. A typical matching service may take ~5% cash commission and 2.5% in warrants (options to buy stock at a fixed price, usually the price/share set by the investors) of the funds transacted through its network. Therefore, a matching service which raises $1M at $5/share may receive $50K cash and warrants to buy 5,000 shares of stock at $5/share at some point in the future (typically within 5 years). In a few cases, the services have their own venture funds that co-invest alongside angels.

Individuals or firms that promise to raise money for a company are called brokers. Just like online matching services, brokers will usually take their commission in cash and equity. Rates for independent brokers may be as high as 8%-10%. Technically, a broker must be registered, in accordance with SEC guidelines, as a broker-dealer, which involves passing various tests. Many individuals who raise money on commission are not technically broker-dealers. If you do not catch this when you sign them on to help you with fund raising, then your lawyers will probably spot the omission later. Some companies have chosen to adhere to the spirit of their agreement by structuring a consulting agreement in which the unregistered broker is compensated at an hourly rate for as many hours as is necessary to pay off the commission.

From an investor stand-point, brokers rarely pass for qualified references. "You should really take a look at this great startup", lacks the ring of sincerity when it comes from a broker trying to earn a commission. Therefore, unless a broker has a successful track record, their services are unlikely to add much value. Some brokers will negotiate onerous clauses that entitle them to a commission on all funds raised in that round, not just the funds the broker brings in directly. The broker may fail to raise any money but will still be entitled to a commission if management succeeds in raising capital. Such terms are absurd; brokers should be compensated only for the money they raise. Furthermore, many investors are not happy knowing that part of their investment is going into a broker's pocket, legitimately so if the broker were not instrumental in bringing the investor to the company.

Investigate a broker's background carefully before working with one. Check references, particularly previous clients, and look for a strong track record.

INVESTMENT BANKS AS BROKERS

Many investment banks offer startups consulting services and may help them raise money from wealthy individuals, including their own high net-worth clients. Such services range may be free or commission based. The goal of the investment bank is to secure the company's future investment banking business.