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1. Liquidation preference
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Angels will likely want to recoup their capital with a kicker or a specified rate of return. I use to do this in the film & television industry with limited investors. Producers would sit on the general management side and the the limited investors would get their capital return plus 20% before a 50 / 50 profit sharing would take place. Angels will want to be protected in case the company liquidates.
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2. Founder Compensation
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Define a realistic executive compensation and be very wary of proposing too much in your Angel term sheet. Be sure to think about your startups burn-rate for cash and what will happen when that runs out. You need to be willing to share the pain of no compensation to make it work if the capital is gone or move on if the business model is exhausted.
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3. Participation rights
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Angels will want the right and option to invest in future funding rounds for the start up. This gives the Angel tremendous upside for taking on the initial risk. This will also ensure guidance and participation from the Angel which could be critical depending on his/her background.
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4. Board of Directors
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Proper guidance and mentoring is essential. The quantity can vary, but quality is the key. The founder will likely be on the board along with one to three members independent of management. The board members should have all made an in-kind or cash contribution to the business.
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If you’re looking for place to find Angels you can check out Angelist, fundingpost and go4funding. Angelist I particularly like because Venturehacks is behind it but there are a number of other similar sites available online as well. You can also grab an sample of a term sheet here.
[…] or business. Pre money valuation is not a dark or mysterious term, but an essential component of a startup term sheet to determine valuation before outside money is infused in your company. The pre money valuation […]