In angel investing, legal expertise plays a pivotal role in determining the success of an investment. While angel investors may question the need for legal considerations, it is crucial to understand that engaging a lawyer with specific experience in startup financing and securities law is essential in navigating the complex landscape of angel investing.
Building a trusting relationship and good chemistry between the founder and the investor is crucial for a seamless deal-making process. It is highly recommended to select a lawyer with experience in startup financing, securities law, transparent fees, strong communication skills (can explain complex legal concepts clearly and concisely), and a strong reputation who is accessible, responsive and compatible/aligned with your investment goals.
Key areas of lawyer participation in Angel Investing
Navigating the complexities of the deal-making process can be challenging. This legal support would be invaluable in guiding one through critical activities within each area, ensuring that your interests as an angel investor are protected and that you have the legal expertise to make informed decisions. Some of the areas include:
- Deal screening: where the company is incorporated, ownership, investment instrument used for investing and legal implications.
- Investment structure: Angels need to decide on the investment structure and the consequences, whether through equity or convertible debt. Each structure has advantages and disadvantages, and the decision will depend on the investor’s goals and the startup’s needs.
- Due Diligence, Valuations and Negotiations: questions on IP Registration and ownership, major contracts signed with suppliers, employee contracts, the deal structure and provisions of the investment instrument such as rights and warrants.
- Deal closing: final legal documents such as shareholder agreements should be articulated. Upon Syndication – the content of the syndicate agreement, the entity being used for syndication and its incorporation (a few ideas will be given in the following blog on the attractiveness of various jurisdictions) and legal obligations and relationships of the Angel signatories.
- Contract terms: Angel investors need to negotiate the terms of the investment with the startup, including the amount of investment, ownership percentage, board seat, and any other terms important to the investor. The legal counsel ensures that the contract terms are legally binding and enforceable.
- Post Investment Deal Management: Angels would need to monitor if covenants agreed to in the syndicate are being adhered to, such as investment documentation, obligations and if the startup is keeping its side of the contract on different agreements, and if in breach, what happens?
- Exits: A lawyer must review term sheets and closing documentation to ensure they align with the expectations of an angel investor, for example, rights on liquidation such as liquidity preferences for Convertible Note, tag/drag alone rights etc.
- Having legal counsel as part of an angel investor’s deal team is a prudent decision, as the benefits of their expertise outweigh any associated costs. In summary, the value of legal counsel in angel investing cannot be overstated, making it an essential component of a successful investment strategy.
Sources and references: African Angel Academy ViKtoria Ventures
