Frank Erschen runs the numbers on this bridge scenario: Seed – let’s say $500,000 from Angels at $2 million post-money = 25% stake. Bridge – let’s say $1.5 million, with new investment at $5 million post-money: • If Angels do not participate, they drop to 17.5% stake, but paper valuation grows from $500,000 to become $875,000 • If Angels do participate – let’s say full pro rata – they add $375,000 (25% of $1.5 million being raised), stake is maintained at 25% and paper valuation grows to $875,000 + $375,000 = $1.25 million • Other new investors in the bridge invest $1.125 million and get a 22.5% stake
This scenario shows one bridge. There can be more in many cases.
From here there are two possibilities: 1. Exit: Say the company is acquired for $30 million – the Angels get 25% or $7.5 million = 8.6X investment and the other bridge investors get 22.5% or $6.5 million = 6X investment. 2. Series A: Say the company raises $6 million at $24 million pre-money/$30 million post-money – the Angels get diluted down to 20%, but the stake now has a paper value of $6 million. We could move along in this scenario by including a secondary offering, where Angels are able to liquidate part of their holdings. Angels vs VCs When traditional VC funds follow on after Angel investments, statistically it takes about a decade longer to exit and risks increase. There are far more failures and far fewer exits of between 1X and 5X. The chance of a 5X or greater exit increases, but at the cost of lower average returns than when Angels invest on their own without VC follow-on funding. — Robert Wiltbank and Warren Boeker , in Returns to Angel Investors in Groups
How to Achieve Good Returns
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