2 min read Angel investor groups require diligent administrative attention. There is a lot of required structure and organization. If you are managing or considering starting an angel investor group, it is important to keep the following structural considerations in mind.
In setting up an angel network, you need to choose an investment structure. Here are some structures to consider:
- Individual investments: The members can each decide if they want to invest and how much to invest in each deal. This allows for maximum flexibility for the members to invest in the deals they want. The drawback is the administration is high, as you must work with each investor in determining their amount of investment and signing of the documents.
- Group investments: The members invest as a group. In this structure, the investors can create a pledge fund to allow the group to decide which deals to pursue. Members have some decision-making control over the investment decisions. This reduces the administrative overhead.
- The group can choose to create a fund in which a screening committee or manager determines which investments are made. This requires the least amount of administration as the manager or committee makes the decisions on their own.
- Lastly, the group can choose to create a sidecar fund that invests from a fund into deals the members have funded individually. The sidecar fund provides members diversification on top of their individual investments. This is also a low-cost administrative structure as the sidecar investment is typically a calculation based on the members’ investment and does not require a manager to run it.
There are several legal structures to use when setting up your angel network. Most angel networks form a Limited Liability Company (LLC). This gives the angel network a legal entity with which it can conduct business. The members often pay an annual fee to fund the operational activities of the company.
Angel networks form in association with a university. Since the university is a non-profit organization, the angel group can work inside the university for its mentoring, networking, and other non-financial activities. For running a fund or making investments, the angel network inside the university must set up an entity outside the university, since non-profit organizations cannot engage in investment activities.
Some angel networks form a not-for-profit LLC and then apply for non-profit status 501(c)3 with the IRS. Again, mentoring, education and other non-financial aspects can be done within the organization, but the financial aspects such as investing must be done outside.
Finally, there are angel networks that form a not-for-profit LLC and then apply for trade organization status or 501(c)6. This structure allows the organization to engage in political activities. Those angel networks choosing a non-profit or trade organization structure must set up a separate legal entity for any funds they want to raise and deploy.
There are two ways to organize your angel network: member-led or manager-led. Member-led groups let the member’s source deals, lead the investments, and recruit the members. They hire staff members to handle the administrative tasks. Alternatively, manager-led groups hire experienced professionals to perform key functions such as determining which startups to fund.
Managers work on screening the deals so only the fundable ones go through to the members. They prepare the founders to ensure that their documents and presentations are ready. They maintain communication with the startup throughout the process. They lead the diligence process and produce the diligence report.
Some angel groups partner with incubators, accelerators, universities, and other groups. The partner provides meeting space and shares the operational cost of the group. Some partners provide administrative support.
The choice of member-led versus manager-led often comes down to the availability of someone to take the role of the manager.
In setting up your angel network you’ll need to set up the meetings.
Here are some key points to consider:
- How many deal flow cycles are you planning?
- Are you online, in person, or conducting both at the same time?
- How will you set up the screening meeting, the presentation meeting, and the diligence follow-up?
- Will there be time between the meetings?
- Do you include a meal, appetizers, or drinks?
- Where will you meet?
- How much time will the meeting take?
- What is the number of companies that will be pitching?
- How much time is set aside for networking?
- What are the duties to be done before, during, and after the meetings?
- How often will the board meet and when?
- Where do sponsors fit into the meeting agenda?
- Will there be education sessions?
- What are the needs of the members and how best to facilitate the education?
- Who is the best to provide the training?
Consider these points in setting up the meetings as it’s a key decision set for the group.
Read more on the TEN Capital eGuide: Leading an Angel Group
Hall T. Martin is the founder and CEO of the TEN Capital Network. TEN Capital has been connecting startups with investors for over ten years. You can connect with Hall about fundraising, business growth, and emerging technologies via LinkedIn or email: email@example.com