Manage your angel investors, or they’ll manage you

Limit them to a small group and be mindful of other pitfalls

In 2016, angel investors pumped approximately $24 billion into startups.

It’s almost certain that an angel will play a role in your startup’s journey, but like everything else in a startup’s life, you need to watch out for potential problems. If you don’t manage them properly, these early backers could get in the way of your startup’s success. The advice from investors and founders below will help you navigate the process of raising a successful angel round while avoiding some of the long-term hassles.

James Currier laughs at how little he knew as a first-time founder looking for angel investors in 1999. The more investors the better, he figured — until he had to handle the fallout of an angel round with sixteen backers.

“They want you to talk to their lawyer and their tax accountant and, before you know it, my 16 angels turned into 64 different relationships,” says Currier, a four-time serial entrepreneur and now a managing partner at early-stage venture firm NFX. “It quite quickly became almost a full-time job checking in with them and taking time to hear all their ideas.”

His advice to founders? Keep your circle of investors as small as possible so you can concentrate on what matters. “This is a time to be as focused as you can on product and customers and revenue,” he says. Raising an angel round is a triumphant moment for any fledgling startup. Yet as with every step of a founder’s journey, there are potential landmines along the way. Failing to manage your angels, Currier and others warn, can distract a company and hurt, rather than help, its chances of success. “They can really gum up the works sometimes,” Currier says.

Be selective

The first thing to keep in mind when thinking about raising an angel round is to choose carefully. “I advise clients to be really thoughtful about who they bring into the seed round,” says Ivan Gaviria, a lawyer at Gunderson Dettmer who has been counseling Silicon Valley startups for more than twenty years. “Clients will say to me, ‘Oh, I need this person because they’re connected in this industry and they’re going to get me leads or whatever,’” he says. “But guess what? Everybody’s well-intentioned, but everybody’s also busy.”

In the vast majority of cases, once angels write a check and get their shares, Gaviria says, “they are not going to spend a ton of time adding value to the company.” Yet Gaviria still sees entrepreneurs pursue what he and others call a “party round,” especially when founders have a well-developed network. “I’ve seen 20, 25, 30 parties, all wanting to drop $25,000 or $50,000 in an entrepreneur’s new endeavor,” he says. “They’re trying to do right by their friends and acquaintances and others who want in on the angel round, but they’re also creating headaches for themselves and their lead investors.”

Gaviria gives the example of “pro-rata rights” — the routine guarantee that angel investors can choose to buy a proportionate number of shares in a future round. “Now 20 or 25 or 30 people have to be notified and the paperwork done for each,” he says.

Set expectations and boundaries for communication

An even bigger challenge is time management and navigating relationships with 20 or 30 people to whom you’ll now feel obliged. “There’s a difference with angels between information versus advice and engagement,” Currier says. “As a CEO, you have to explain to angels the difference. Because some angels want to be entertained.” Those investors hope for a financial return, of course, but they also relish the idea of having a front-row seat to your entrepreneurial journey. To make sure that desire doesn’t turn into a burdensome series of check-ins and inopportune “how is it going” calls, NFX gives founders a template for communications with investors. A monthly report helps to set both expectations and boundaries, Currier says.