Posted on by Phil

“Plain Vanilla” Angel Structure

It’s the middle of internet week!  I’ve already seen 30+ demos, in addition to Meetup Co-Founder Scott Heiferman smashing an iPad on stage at the tech meetup last night (which was at NYU’ Skirball center).  One theme that has been recurrent is that people are unaware of the structure of angel investments.  So, I thought I’d give a brief overview of one common structure.  Please note there is an excel file you can download at the bottom of the post.  It includes detailed notes and may be helpful to have open as you go through the post.

Many seed stage internet businesses look to angels to help them kickstart their companies through growth capital, as well as expertise.  It seems that many people are confused as to what a typical angel investment might “cost” them in equity.  And, while “a convertible note with a 10% PIK and a 25% discount to the series A” (also known as the “plain vanilla” angel structure) may make sense to some people, I thought I’d break down how to interpret that in case there were any non finance geeks out there who were trying to understand what the terms of an angel investment actually mean.

The Basics

I think it’s easiest to use an example to explain this type of investment.  So, Joe is the founder of Newco which is a website that does some sort of location/game based virtual good (insert other buzz words) service.  Joe needs to raise $500,000 to hire a few developers and a sales person.  Joe finds an angel investor who just happens to have a lot of experience in location/game based virtual good services.  Joe’s investor, let’s call her Ms. Jenna, gives him $500,000 and they use the plain vanilla (read typical) angel structure.

Instead of putting a value on the company now, the investor, will get equity based off of the valuation used in Joe’s Series A round of financing (more on that later).  Presumably, when Joe raises his Series A, he will have a few customers, some revenues, and a much better picture for how his company will actually operate.  His company will therefore be more easily valued.

The PIK

PIK stands for paid in kind.  Ms. Jenna is putting up $500,000, and expects Joe to pay her 10% in interest each year.  But, Joe doesn’t have any cash as he is a pre-revenue startup.  So, instead of paying in cash, Joe is going to take the value of the dollars he would pay Ms. Jenna, and add that to the principal of the investment.

In our example, in the first year, Joe will take the 10% interest payment (worth $500,000 x 10% = $50,000) and add that to the principal of the investment, which will now be $500,000 + $50,000 = $550,000.  In the next year, Joe will be charged 10% on that new principal.  His new interest payment is $550,000 x 10% = $55,000.  And his new principal amount is $550,000 + $55,000 = $605,000.  For those familiar, this is the same concept as a negatively amortizing loan.  Instead of paying interest in cash, it is paid as principal, which is the same as saying it is paid in kind (PIK).

The Equity Part of the Equation

We are going to pretend that Joe had a rough go of it and doesn’t raise his series A for 5 years.  In year 5, the principal value of Ms. Jenna’s investment is now $805,225 (please see attached excel to see the calculations, rows 19 and 20 – we just added the 10% interest in each of the 5 years).  The series A investor gives Joe $1 million dollars at a $4 million post-money valuation meaning that they will get $1 mm/$4 mm = 25% of Newco’s equity.  For the difference in pre vs post money valuations, please see the attached excel cell C14.

We said that the angel investment would be invested at a 25% discount to the series A.  This means that instead of investing at a $4 million valuation, Ms. Jenna’s dollars get put to work at a $4,000,000 x (1-25%) = $3 million valuation.  And, her $500,000 originally invested has grown to $805,225 due to the interest which has been paid in kind.  So, her ownership in the company will be $805,225/$3,000,000 = 27%.

At the risk of complicating things, it is worth noting that Ms. Jenna’s original angel investment can also come with a valuation cap, meaning that there is a maximum value that her dollars can be put to work at.  In the excel, I have put this at $10,000,000 so it doesn’t come into play.  But, if Joe’s company was worth $20,000,000 in 5 years when he raised his series A, Ms. Jenna’s equity would be calculated using a valuation of $10,000,000, not the typical 25% discount we have used in our example.  You can see how this benefits the angel investor in the case that they company does take off.  Ms. Jenna will invest her money at a $10,000,000 valuation as opposed to a $ 15,000,000 valuation ($20,000,000 x (1-25%) = $15,000,000)  which would give her a larger equity stake in the company.

End Result

Joe has now raised $1.5 million and is hopefully well on his way to a successful career at the helm of Newco.  He has given up 25% to his series A investors, and 27% to his angel investor Ms. Jenna, and so retains 48% for himself and the rest of his team.

The attached excel sheet has all of these calculations and is set up in a way that you can play around with different assumptions.  Please feel free to email me with any questions! phil (at) philstrazzulla (dot) com.  Also, please note that this is meant to be an overview of one type of common angel structure and that there are definitely more out there.   Enjoy!

The Excel: Angel Investing Basics

7,477 Replies to ““Plain Vanilla” Angel Structure”

  1. An impressive share! I’ve just forwarded this onto a co-worker
    who was doing a little research on this. And he in fact bought me lunch
    because I found it for him… lol. So let me reword
    this…. Thank YOU for the meal!! But yeah, thanx for
    spending time to discuss this topic here on your blog.

  2. Pretty part of content. I just stumbled upon your site and in accession capital to assert that I get actually loved
    account your blog posts. Anyway I will be subscribing on your augment and even I
    fulfillment you access constantly rapidly.

  3. Thank you for any other magnificent article.
    The place else could anybody get that kind of info in such a perfect method
    of writing? I’ve a presentation subsequent week,
    and I am on the search for such info.

  4. Wonderful site you have here but I was wondering if you knew of
    any message boards that cover the same topics discussed here?
    I’d really like to be a part of community where I can get advice from other knowledgeable
    individuals that share the same interest. If you have any suggestions, please let me know.
    Bless you!

  7. practical review. Also visit my personal, personal site to be able to slot online pulsa.
    This excellent site has received destination by slot pulsa tanpa
    potongan games people in Indonesia. Certainly, there will be many advisable promos
    in the event you join at this point.

  8. Hey there! This is my first visit to your blog!
    We are a group of volunteers and starting a new project in a community in the same niche.
    Your blog provided us valuable information to work on. You have
    done a outstanding job!

  11. Nice post. I was checking constantly this blog and I’m impressed!
    Extremely useful info particularly the last part 🙂 I care for such info a lot.
    I was seeking this certain info for a long time. Thank you and best of luck.

  12. What’s Taking place i’m new to this, I stumbled upon this I’ve found It absolutely helpful and it has aided me out loads.
    I am hoping to contribute & assist other users like its helped me.
    Good job.

  15. Hey there are using WordPress for your blog platform?
    I’m new to the blog world but I’m trying to get started and set up my own. Do you require any coding expertise to make your own blog?

    Any help would be really appreciated!

  16. Hey are using WordPress for your site platform? I’m new to the blog world but I’m trying to get started and set up
    my own. Do you require any html coding knowledge to make your
    own blog? Any help would be really appreciated!

  17. Hello there, There’s no doubt that your blog might be having internet browser
    compatibility issues. When I look at your site in Safari,
    it looks fine but when opening in I.E., it’s got some overlapping issues.
    I merely wanted to provide you with a quick
    heads up! Besides that, fantastic site!

    Take a look at my blog post land for sale

  18. When someone writes an post he/she keeps the image of a
    user in his/her mind that how a user can be aware of it.
    Therefore that’s why this article is perfect. Thanks!

  22. Having read this I thought it was rather informative. I appreciate you taking
    the time and energy to put this article together.
    I once again find myself spending way too much time both reading and posting comments.
    But so what, it was still worth it!

  23. Hey there, I think your website might be having browser
    compatibility issues. When I look at your website in Firefox, it
    looks fine but when opening in Internet Explorer,
    it has some overlapping. I just wanted to give
    you a quick heads up! Other then that, awesome blog!

  25. useful review. As well visit the site to find slot. This site has received ranking having judi slot
    gambling men and women in Dalam negri. There are usually plenty of a lot more pleasing promos
    in case you join now.

  26. Howdy! I know this is somewhat off topic but I was wondering which
    blog platform are you using for this site? I’m getting fed up of WordPress because I’ve
    had problems with hackers and I’m looking at
    options for another platform. I would be fantastic if you could point me in the direction of a good
    platform.

  27. Undeniably believe that which you said. Your favorite justification seemed to be on the
    net the easiest thing to be aware of. I say to you, I definitely get
    irked while people think about worries that they plainly do not know about.
    You managed to hit the nail upon the top as well as defined out the whole thing without having side effect , people can take
    a signal. Will likely be back to get more. Thanks

  28. Good day! I know this is kinda off topic nevertheless I’d figured I’d ask.
    Would you be interested in trading links or maybe guest
    authoring a blog post or vice-versa? My blog
    addresses a lot of the same topics as yours and I feel we
    could greatly benefit from each other. If you might be interested feel free to send
    me an e-mail. I look forward to hearing from you!
    Great blog by the way!

  29. I have been browsing online more than 2 hours today, yet I never found any interesting article like yours.
    It is pretty worth enough for me. Personally, if all
    web owners and bloggers made good content as
    you did, the internet will be a lot more useful than ever before.

  31. I’m amazed, I must say. Seldom do I encounter a blog that’s equally educative and
    entertaining, and without a doubt, you have hit the nail on the head.
    The problem is an issue that too few men and women are
    speaking intelligently about. Now i’m very happy that I came across this in my hunt for something
    relating to this.

  32. Hi there! This is my first visit to your blog! We are a team of volunteers and starting
    a new project in a community in the same niche. Your blog provided us valuable information to work on. You have done a outstanding
    job!

  33. I enjoy what you guys tend to be up too. This type of clever work and reporting!
    Keep up the wonderful works guys I’ve added you guys to my blogroll.

  35. After I initially commented I seem to have clicked
    on the -Notify me when new comments are added- checkbox and now whenever a comment is added I recieve 4 emails with the exact same comment.
    Is there a way you can remove me from that service?
    Cheers!

  41. useful review. Additionally visit that site to see slot pulsa online.
    These pages has received reputation coming from slot deposit
    pulsa tanpa potongan games associates in Indonesia.
    Now there tend to be a lot of classy promos for those who join at this point.

  43. Hi! I’m at work surfing around your blog from my new iphone!

    Just wanted to say I love reading through your blog and look forward to all your posts!
    Keep up the great work!

  45. I’ve been exploring for a little bit for any high quality articles
    or weblog posts in this kind of house . Exploring in Yahoo I ultimately stumbled upon this website.
    Studying this info So i am glad to express that I’ve
    an incredibly just right uncanny feeling I discovered
    just what I needed. I so much undoubtedly will make certain to don?t
    forget this website and provides it a glance regularly.

  46. Normally I do not learn article on blogs, but I wish to
    say that this write-up very compelled me to check out and
    do so! Your writing taste has been amazed me. Thank you, very nice post.

  49. Thank you for the auspicious writeup. It in fact was a amusement account it.
    Look advanced to more added agreeable from you! By the way, how could we communicate?

  50. Thank you, I’ve recently been looking for information approximately this subject for a long time
    and yours is the greatest I’ve found out till now.

    But, what in regards to the conclusion? Are you certain about the supply?

Comments are closed.