The Angel Investor's Handbook How to Profit from Early-Stage Investing

by Benjamin, Gerald A.; Margulis, Joel B.

• ISBN13: 9781576600764
• ISBN10: 1576600769
• Edition: 1st
• Format: Hardcover
• Copyright: 2001-07-01
• Publisher: Bloomberg Press

Summary

Gerald Benjamin and Joel Margulis demonstrate that the real pitfall for potential investors is an incomplete understanding of the complexities of early-stage investing. At the same time, the angel capital market offers few mechanisms for bringing investors and entrepreneurs together, while securities regulations restrict communication between sophisticated investors and promising new businesses. So, where do the uninitiated start, and how do they separate the wheat from the chaff? In this ground breaking work, Benjamin and Margulis offer angel investors a hands-on manual for profiting from early-stage, private equity deals. They show how to develop investment criteria and overall game plans, locate viable investment opportunities, assess and manage risks, negotiate the most favourable deal terms, conduct thorough due diligence, and plan the all- important exit strategy.

Author Biography

GERALD A. BENJAMIN, MS, is Senior Managing Partner of International Capital Resources (ICR) in San Francisco, and is recognized by entrepreneurs, investors, venture organizations, and academic entrepreneurial finance programs as one of the nation's leading authorities on the angel capital market. Over 50,000 entrepreneurs have attended Benjamin's seminar, "Angel Financing: How to Raise Private Equity for the Early-Stage Venture," which has been sponsored and presented by over 200 prominent entrepreneurial and investor organizations in the United States. His research in the field has been covered by the Wall Street Journal, Time, Barron's, Investor's Business Daily, and many other publications. Benjamin received his BA and MS degrees from the University of San Francisco.

JOEL B. MARGULIS is a member of the English Department at San Francisco State University and has authored and coauthored a number of books on a variety of subjects. He received his BA in history and MA in English from the University of Missouri-Columbia.
Margulis is a freelance writer who has published books and articles on a range of business and finance topics.

Table of Contents

Acknowledgments	p. xv
Preface	p. xvii
Introduction	p. 1
An Overview of the Angel Capital Market	p. 9
Defining Angel Capital and Pre-IPO Investments	p. 9
Trends Increasing Private Equity Investment	p. 10
How Angel Capital Has Provided an Infrastructure for Today's Economy	p. 13
Inefficiencies in the Market for Early-Stage Company Equity	p. 14
Government Attempts to Facilitate Pre-IPO Investments	p. 16
The Roles of Traditional Venture Capital and Angel Investors in the Early-Stage Capital Market	p. 19
The Pre-IPO Investment Opportunity Defined	p. 24
How Angel Investors Add Value Beyond Capital	p. 25
Introduction to the Pre-IPO Investment Process	p. 27
Key Factors in Successful Angel Investing	p. 29
Why Angel Investing Is Attractive	p. 29
Specifics on Private Equity Classes	p. 31
Demographics of Angel Investors	p. 32
Required Skills for Successful Angel Investing	p. 34
Developing Angel Investment Criteria	p. 38
Structuring an Angel Investment Plan	p. 41
Harmonizing Financial and Psychological Returns	p. 43
Commonsense Guidelines for Successful Asset Allocation Decisions	p. 49
Guiding Principles for Prospective Angel Investors	p. 52
Understanding and Managing Risk	p. 55
Disadvantages of Angel Investing	p. 57
Assessing Risk in a Potential Investment	p. 58
Differentiating between Indirect and Direct Venture Investment	p. 60
Assessing Your Own Risk Tolerance Level	p. 63
Managing Risk with Proven Hedging Strategies	p. 65
Types of Angel Investment Strategies	p. 69
Defining Angel Investment Strategy	p. 69
How Demographics Affect the Choice of Active or Passive Angel Investment Strategies	p. 70
Variations in Angel Investment Strategies	p. 73
Active Angel Investment Strategies	p. 78
Passive, Indirect Angel Investment Strategies	p. 88
Deal-Flow Development: Surfacing Angel Investment Opportunities	p. 95
How Angels Historically Have Located Deals	p. 95
Satisfaction with Traditional Deal-Flow Development Techniques	p. 96
Developing Your Angel Investment Goals and Objectives	p. 97
Shifting from Informal to More Formal Deal-Flow Development	p. 100
The Essential Elements in a Formal Deal-Flow Development Strategy	p. 102
Targeting, Positioning, and Defining Investment Size	p. 104
Organizing Investor Identity Materials and Deal-Flow Tracking Systems	p. 108
Criteria for Selecting the Most Appropriate Communication Channels to Attract Deal Flow	p. 110
Advertising	p. 112
Public Relations	p. 121
Referral-Based Networking	p. 126
Caveats: Deal-Flow Development Approaches to Avoid	p. 128
Managing the Due Diligence Process	p. 131
Why Due Diligence Is So Important in Today's Angel Market	p. 131
Beware of Dead Ends on the Road to Riches: Case Studies from the Dark Side of Early-Stage Investing	p. 135
Greed and the Entrepreneur's Loss of Ethics	p. 138
Government Regulation and Legislation	p. 141
Screening Opportunities with the Investor-Oriented Executive Summary	p. 143
Why You Should Require a Business Plan	p. 146
Investigating the Entrepreneur and Management Team	p. 149
Separating Fact from Fiction in Venture Documentation	p. 152
Knowing When to Say "No"	p. 160
Who Pays Due Diligence Expenses?	p. 162
The Preinvestment Audit	p. 165
The Analytical Research Approach to the Preinvestment Audit	p. 165
The Preinvestment Audit Questionnaire	p. 167
Analysis of Financial Projections	p. 178
Can Management Reach the Forecast Objectives?	p. 179
Interrelationships of Financial Projections	p. 180
What Are the Company's Expected Financial Needs?	p. 182
How Much Funding Is Sought?	p. 182
Evaluating the Company's Stated Capital Needs	p. 183
Analyzing the Forecast Balance Sheet	p. 184
Description of the Balance Sheet	p. 184
Liabilities	p. 186
Shareholders' Equity and Net Worth	p. 187
The Income Statement or Statement of Operations	p. 188
The Income Statement	p. 189
Cash Flow Forecast	p. 190
The Forecasted Cash Flow Statement	p. 191
Use of Proceeds	p. 192
Financial Assumptions	p. 193
Company Investors, Directors, Advisers, and Resources: Lists for Reference Checks	p. 194
Miscellaneous Documents Required for Analysis	p. 194
Negotiating and Structuring the Deal	p. 197
Definition of Negotiation	p. 197
Market Inefficiencies Make Negotiation a Must	p. 198
Negotiating the Transaction	p. 199
Negotiation Mistakes Made by Angel Investors	p. 199
Simple Guidelines for Professional Angel Investment Negotiations	p. 201
The Private Placement	p. 202
Choice of Securities for Angel Investors	p. 204
The Role of Legal Documentation in Private Equity Transactions	p. 206
Misuse of Business Plans as Investment Documentation	p. 207
Overview of Legal Documents Used in Venture Investment Transactions	p. 208
Using a Term Sheet to Structure the Angel Investment	p. 211
Model Term Sheet Checklist	p. 217
Valuation of the Early-Stage Company	p. 219
Pricing as Good Judgment, Not Formulae	p. 219
Factors in Valuing Potential Investments	p. 222
Macroeconomic Forces in Valuation	p. 223
Subjective Determinants of Valuation	p. 224
Fundamentals of Valuing Start-Up Ventures	p. 229
Sweat Equity: The Investor's Perspective	p. 236
Overseeing and Advising Postinvestment	p. 239
Definition of Monitoring the Investment	p. 239
Passive Monitoring and Evaluation Techniques	p. 243
Active Monitoring and Evaluation Techniques	p. 246
Harvesting Returns: Exit Routes to Liquidity	p. 249
Planning for the Angel Investor's Financial Reward	p. 249
A Contrarian Perspective on Liquidity in Public versus Private Markets	p. 250
The Importance of Identifying Exit Strategy before Investing	p. 253
Reasonable Expectations for Investment Return and Hold Time	p. 254
Evaluating Your Returns	p. 255
Realistic Exit Routes	p. 256
The Living Dead: Coping with the Marginally Performing Investment	p. 262
Restricted versus Free-Trading Stock	p. 263
Transforming Investment Losses into Tax Gains	p. 265
Conclusion	p. 268
Internet Directory	p. 271
Angel Investing Conference/Forum Directory	p. 277
A Model Term Sheet	p. 289
Valuation Case Study	p. 301
Hypothetical Valuation Example	p. 311
Frequently Asked Questions	p. 317
Suggested Reading List	p. 323
Supplementary Reading	p. 325
Glossary	p. 333
Index	p. 341
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