Mentor-Driven Capital: 10 principles for business angels and startup founders

Mentor-Driven Capital – Ten Principles for business angels and startup founders

Anything that streamlines the investing process, helps ensure fair dealings and offers a common and shared code of ethics, is good for the community. We share these 10 Principles for Business Angels and Startup Founders as a reference point for entrepreneurs and business angels structuring their interactions and working to align their expectations. It is not a contract, but a simple philosophy we own and manage as members of a shared network and community.

1. The entrepreneur expects clarity from the business angel, and the business angel deserves transparency from the entrepreneur

Entrepreneurs deserve to know the intentions of the business angel and what they can realistically contribute in terms of hard and soft capital support. But the business angel should have the right to the truth and the whole story. Looking at the African investment space, too often the real threat isn’t a ‘scam entrepreneur’ trying to pick up free money, but business angels stringing entrepreneurs along as they endlessly research the opportunity or look for ways to take advantage of a market situation where they benefit from the entrepreneur’s lack of information.

The entrepreneur has the right to protect themselves and to know about the business angel, their background and true intentions to invest. At the same time, business angels deserve transparency from the entrepreneur. They have the right to know about ANY and ALL factors that could in any way jeopardize the venture’s ability to operate successfully. Rogue employees, copied intellectual property, pending lawsuits or other issues should be disclosed or the engagement is doomed to fail from the start. Proactive sharing and a complete and honest story are essential for both parties to engage successfully.

2. The entrepreneur deserves quick and clear decision making from the business angel, and the business angel has the right to pull out of an investment

Put your money where your mouth is. If a business angel makes a commitment, it is fair for the entrepreneur to hold the business angel to their word. If a commitment is made by a business angel, it should also be executed in a timely fashion. Otherwise, false promises simply stall an entrepreneur’s progress and hinder their efforts. Entrepreneurs should document an agreement as quickly as possible and get confirmation from the business angel in writing. At the same time, there are situations in which the business angel is unable to proceed for whatever reason. Given the terms of a deal change, the circumstances, or new information is brought to light during the due diligence process, the business angel always has the right to pull out of a deal.

3. The entrepreneur should own the company, but the business angel has the right to make a financial return

The entrepreneur has the right to keep a controlling stake in the company. After all, it is the entrepreneur who creates the opportunity and should have the most invested in the future of the venture. There is no reason for the business angel to take a majority stake in the business. At the same time, the business angel has the right to a financial return and should always have the mechanisms necessary to protect their investment. This can be through a preferred status when distributing dividends or terms enacted when the business exits. The business angel also holds the management team accountable for their performance.

4. Entrepreneurs deserve simple, fair and straightforward documentation they understand, and business angels have the right to secure their investments

The entrepreneur deserves a straightforward deal under fair terms. There is no reason to reinvent the wheel. There are standard documents that can be used to establish deal terms that are good for all parties involved. Following best practices helps to streamline the investment process, minimizes legal costs and avoids any potential misunderstandings. No party benefits from confusion or surprises later down the road. At the same time, the business angel always has the right to protect their investment and to secure a reasonable return. But where control mechanisms are built into a deal, the entrepreneur should at least understand how they work and under what conditions they can be actioned.

5. Entrepreneurs deserve transparent and timely decision making, and business angels have the right to walk away from a deal

Business angels need to think for themselves. It is not ok to keep the entrepreneur guessing, leading them on with the prospect of investing, and constantly changing the conditions for their participation. Either the business angel is interested in investing and will make a commitment or they won’t and should step away from the deal. Be crystal clear about this. Don’t spend three months on due diligence and drag the process on endlessly. It’s the indecision that prevents the creation of great companies. Fast decision making is what gets deals done and pushes new ideas into the world. At the same time, the business angel has the right to conduct due diligence and to make sure they have adequate levels of information needed to place an investment.

6. Entrepreneurs deserve to get more than just money from business angels, and business angels deserve to be consulted on important issues

Many times, it is not about the money but about the network, knowledge, and business experience a business angel can bring to the table. Entrepreneurs need partners in building their business and the business angel should play a proactive, constructive and supportive role in helping their companies achieve success. This means making themselves available to the entrepreneur when needed. At the same time, the business angel has the right to be involved in strategic issues as they are known by management and the entrepreneur should take the input, insights, and advice of the business angel into serious consideration when dealing with important issues.

7. The entrepreneur deserves to remain the director post-investment, but business angels have the right to replace the entrepreneur if the job’s not getting done

The entrepreneur is in control of the company and is the key actor in building the business. If the business angel loses confidence in the entrepreneur, the first step is to strengthen the team with the right expertise. At the same time, the business angel should be able to monitor a venture’s progress and hold the entrepreneur accountable for the results. When things are simply not being taken care of, it is time for the entrepreneur to go. There should be no surprises about when and how this happens!

8. Entrepreneurs deserve support in difficult times, yet business angels have the right to prevent their investments from being wasted

Building a company anywhere in the world is difficult. Building a company in nascent markets where infrastructure is sometimes lacking can be even harder. Entrepreneurs have a right to turn to their business angel when they need help. Things happen differently than planned, and its inevitable things will go wrong. The business angel needs to be there to support the entrepreneur when they do. At the same time, monies invested in the company should be allocated as agreed. The entrepreneur should not sit on unused funds, waste or redirect resources out of character with the terms of the investment. Business angels have the right to hold the entrepreneur accountable and to protect the capital they have put into the business.

9. Entrepreneurs have the obligation to focus on building the business, where business angels deserve the right to timely and transparent reporting

Entrepreneurs might find reporting time consuming and distracting from building the business. Sometimes it seems like a neverending cycle. Especially when the business angel follows up with question after question. The entrepreneur has the right to focus on the tasks of building a great company while the business angel has the right to get accurate, timely and transparent feedback. Reporting expectations should be agreed upfront. It is impossible for the business angel to know about every aspect of the company, but the entrepreneur must take the effort to ensure the business angel knows about any issues of material importance to the business.

10. Entrepreneurs have the right to protect their businesses in the same way business angels have the right to protect their investments

There is no crystal ball and anything can happen, expected or completely unexpected. Both the entrepreneur and the business angel have the right to protect their investments. At the same time, as a member of the VC4A community, we should remain fair to each other in our dealings no matter what happens. Building the African startup ecosystem means we must trust in each other, and build on our willingness to collaborate and compromise as needed. After all, at the end of the day, we are all in this for great African venture success!

VC4A is a community of entrepreneurs and investors who share an interest in building businesses in Africa. As part of this community, we believe the future of the continent depends on our ability to unlock the most promising ideas. We all have a responsibility to lead by example because, at the end of the day, our mission is to realize human potential for the benefit of the world.

About VC4A

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