A Practical Guide to Angel Investing (2nd Edition)

Dividend – Cash paid out by the company to its shareholders is called a dividend. All shareholders may receive the same dividend payment, or different classes of shares, such as preference shares held by Angels, may receive different payments. In some cases, an event might trigger the dividend, such as three years from the date of financing, achieving positive cash flow, or getting a bank loan. This may be a very slow method for investors to get their money paid back, but it is better than nothing and may add up over time. Royalty – A royalty is a percentage of revenue, paid to an investor, creditor or licensor. Some investors will have a clause to be paid something like 1–5% of revenues until they get their money back, or some multiple of their investment. This kind of clause is generally seen as inhibiting company growth and reducing the probability of a good exit. Most Angels do not use this payback mechanism. (As mentioned in the profile in section 4, the Northern Ontario Angels prove the diversity of Canada by regularly doing these deals.) Share Buy-Back – Sometimes, the founding team may have the right to buy the investors out of their shares. In other cases, preferred shareholders may be able to force the repurchase of their shares. Or, the parties could mutually agree to part ways, with some participants selling their shares to the others. Public companies often use this mechanism to enhance their share prices. Mary Long-Irwin of Northern Ontario Angels uses a number of these methods to ensure investors get their money back: “We do not look for the next Google, we look for good companies that need Angel investment and/or support. We look for companies that will create jobs, grow the economy in Northern Ontario, and provide a return on the investment. We support early exits by encouraging the companies to pay the investors back as quickly as possible. This way, the investor will be inspired to invest in the next company.” 6.4 Fast Fail, Expensive Fail, and Zombies There are, of course, also negative exits. If the company is destined to fail, then it is better to fail quickly rather than continue to invest, only to fail later. This is why it is so important to understand what the key hypotheses and big bets are (section 3.3.2) and establish key metrics to track (section 5.2). This dynamic learning lets you make better decisions about whether to pull the plug on the company or continue to invest time and money. Professional investors and entrepreneurs know when to quit and move on. Instead of hanging on too long, failing to meet payroll and leaving a list of unhappy creditors, they wrap up the company in a timely manner, with poise and honesty. These life-and-death decisions are tough to make. In many cases, you are simply not close enough to the company and instead leave it in the hands of the entrepreneurs. It is their baby, after all. If they can make a go of it without you and never pay back their investment, they become zombies.

98 A Practical Guide to Angel Investing

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