Investing and vesting can be one of the most profitable and important element of a corporate structure. Both the entrepreneurs and investors can benefit a lot from shares investment. Also, this is one platform where both the angels and the entrepreneurs start with equal footing. Stock investment can also have a powerful effect on the psychology of the whole group as well as their culture. There are many companies, who are not able to sustain themselves, only because the stock market investment options are not too bright, or if the options are there, they are not utilized properly.
While employee ownership is still a rather new concept, it is catching on fast. Logic dictates, that just as the angel investors would be more involved in the company because of the money they have invested, the employee too work harder and take more responsibility when their money is at stake. Of course, there have been debates in whether giving stock investment options to angels is the best thing to do in an entrepreneur and angel relationship, however, if the angel does have stock options in your business, there are more chances that your benefactor will take in more interest in the well being of your company. This can help especially when you are in need of second round financing and funds in the market are scarce. If your investor has stake in your business in terms of stocks investment, they will arrange for you to get money. They could do it in several ways, they can get you in touch with other angels or angel consortiums or they can arrange for money themselves, to loan to you. Either way, you will be the one benefiting.
It is important for an entrepreneur to take into consideration the advantages of offering equity to their benefactor while preparing the business proposal itself. While you may think that this can be too premature, studies have revealed that more often than not, investors wish to have equity or some other form of ownership in your business. They seldom want full control of your business, however, a small amount of control is something that they wish for and enjoy. When you meet the investor backing you up, it is only prudent to discuss with them a range of equity that will be reasonable for them when they become a part of the company. Since for the angels, investing in your business is a means to earn more money, stock investment options can be a lucrative offer.
Many investors often make stock market investment on their own. Since the investment in small and medium businesses can be extremely risky, investors are always advised to have an investment portfolio and diversify the nature of their investments. There is no vesting formula for stock options for angels. The options would, of course, vary according to the growth projections for your company. The magnitude of equity ownership will also be determined by these considerations. The length of time for the investment is also something which should be seriously considered. About three decades ago, linear stock investments for ten years was the practiced norm. However, the technology has changed and with the maturing industries and volatile markets, the vesting periods have been shortened drastically.
Some business think vesting periods which are as short as 18 months can be sufficient for the investor. However, the length of the vesting period depends completely on the motivation of the individual investor. The common ranges for vesting period are about 4 to 6 years.
The motivation of the angels varies from individual to individual. Each individual has their own criteria of what they see profitable. While some individuals want nothing to do with the business for 5-7 years after they have invested their money into the business, there are others who want securities in the form of shares investment and other stock options. It has been seen that apart from the stock investment options, most angels also wish for a position of importance within the business. A position in the board of directors along with other stock market investment opportunities is often just the right hook for the investor. It is important to note that though investors are eager to find investing opportunities, they often do not invest until they get exactly what they want.
Shares investment is not something that entrepreneurs should be afraid of. Numerous studies have shown that vesting a proportion of the power in the hands of the investor by offering them stocks investment, can ultimately be a beneficial move. This way both the investors and the entrepreneurs have something to gain.
The return objectives of the investors may vary from an internal rate of return of 30%, to sales projections which may range in the amount of $20 Million, in the first five years. If your investor is particularly attached to the business and is interested in seeing it grow, and if you believe that the experience of the investor can offer a lot to your business, you can pursue the investor to stay on by providing them options for stocks investment. You can also offer them a percentage ownership of your business.
To protect their stocks investment, angels may ask you to consult with them if you are planning to sell of a substantial amount of the company stock. They may also like to be consulted if you agree to issue additional stock to the management or plan to sell the stock at prices below which you issued them to the investors. All of these should be determined right when you are formulating the contract and the legal documents for the association.