(This article was originally published in Mass High Tech on September 29, 1999)
A wealthy individual who invests his own money in early-stage companies is known as an "angel." Some angels approach investing like bankers, carefully structuring their investments to minimize risk and maximize both return from and control over their portfolio companies. Others are more like the entrepreneurs they back, making simple investments and leaving control of the company with management.
Let’s compare two $250,000 investments. Both portfolio companies are Internet start-ups. We’ll call them "MoreMoney.com" and "CategoryKiller.com" (both fictitious names).
The MoreMoney.com investment looks like a standard venture capital deal, with 97 pages of legal documentation. The angels can control the company with veto power over the annual budget, capital expenditures and additional stock sales. For legal protection, angels have a liquidation preference, anti-dilution protection, pre-emptive rights,
