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. I think that what you posted made a bunch of sense. However, think about this,
    suppose you were to create a awesome post title?
    I ain’t saying your information isn’t solid, however
    suppose you added something to maybe get a person’s attention? I mean “Plain Vanilla” Angel Structure – Phil Strazzulla's
    Blog is kinda boring. You should glance at Yahoo’s home page and note how they create article headlines to get people to click.

    You might add a video or a related pic or two to get readers interested about everything’ve written. In my opinion, it might bring your posts a little bit more interesting.

  3. istanbul pendik escort Tatlı enerjiyi güzel bir şekilde gerçekleştiren şehveti oluşturan ve tadını alarak bu konularda gerçekten kendime güveniyorum

  4. Hmm it seems like your blog ate my first comment (it was
    super long) so I guess I’ll just sum it up what I wrote and say, I’m thoroughly enjoying your blog.

    I as well am an aspiring blog writer but I’m still new to everything.
    Do you have any suggestions for novice blog writers? I’d genuinely appreciate
    it.

    Feel free to visit my web-site – VIP Outcall Massage London

  6. For most up-to-date news you have to pay a visit internet and on world-wide-web
    I found this site as a finest web site for newest updates.

  10. Fantastic beat ! I wish to apprentice even as you amend your site, how can i subscribe for a blog site?
    The account helped me a acceptable deal. I were a little bit acquainted
    of this your broadcast provided vibrant clear idea

  11. Ahaa, its fastidious conversation concerning this paragraph at this place at this website, I have
    read all that, so now me also commenting here.

  14. Wer im Urlaub oder im Büro nicht nur Fotos sehen möchte, die der Saugroboter
    während seiner Arbeit macht, sondern dieses Gerät
    auch mit allen seinen Funktionen steuern möchte, für den ist
    ein Saugroboter mit einer App-Fernsteuerung genau das
    richtige. Im Gegensatz zur klassischen Fernbedienung, über die heutzutage
    praktisch jeder Saugroboter verfügt, sind Geräte mit einer App-Fernsteuerung
    erst auf dem vormarsch. So sind sie z.B. Allerdings sind solche Geräte meist erheblich vielseitiger
    als ihre klassischen Konkurrenten ohne App-Fernsteuerung.
    Lage, den Wohnraum mit einer integrierten Kamera mit Bewegungssensor zu überwachen, sie können Mails mit Fotos an den Besitzer schicken und gezielt in Wohnräumen nachschauen, ob
    das Licht (oder z.B. Landläufig können Saugroboter
    auch völlig ohne Licht arbeiten. Zu beachten ist aber: Staubsaugerroboter mit Kamera-Navigation finden sich
    in abgedunkelten Räumen nicht mehr zurecht, ihre Navigation versagt hier völlig.
    Dagegen funktioniert die Steuerung über virtuelle Wände bzw.
    Leuchttürme auch in völlig dunklen Räumen hervorragend, da hier mit unsichtbaren Infrarotstrahlen gearbeitet wird.

  15. Very great post. I simply stumbled upon your weblog and wished to mention that I’ve really enjoyed browsing your blog posts.
    In any case I will be subscribing for your feed and I am hoping
    you write once more soon!

  19. You really make it seem so easy with your presentation but I find this matter to be actually something that I think I would never understand.
    It seems too complex and very broad for me. I am looking forward for your next post, I’ll try to get the hang of it!

    Also visit my site … timberland for sale

  21. Having read this I thought it was rather enlightening.
    I appreciate you finding the time and energy to put this informative article together.

    I once again find myself personally spending a significant amount of
    time both reading and leaving comments. But so what, it was still worthwhile!

  23. Hey There. I discovered your blog the use of msn. That is a really neatly written article.

    I will be sure to bookmark it and return to read more of your helpful information. Thanks for the post.

    I will definitely return.

  24. Greetings! Quick question that’s entirely off topic.

    Do you know how to make your site mobile friendly? My website looks weird
    when viewing from my iphone. I’m trying
    to find a template or plugin that might be
    able to correct this problem. If you have any suggestions,
    please share. With thanks!

  27. Nice blog here! Also your website so much up very fast!
    What web host are you the use of? Can I get your affiliate link on your host?
    I want my web site loaded up as fast as yours lol

  28. Wonderful goods from you, man. I have be aware your stuff prior to and
    you are just too magnificent. I actually like what you have obtained
    here, really like what you’re stating and the way in which by which you say it.
    You’re making it entertaining and you still take care of to
    keep it wise. I can not wait to learn much more from you. This is
    actually a terrific web site.

  39. After I initially left a comment I seem to have clicked on the -Notify me when new comments
    are added- checkbox and from now on each time a comment is added I
    recieve 4 emails with the same comment. There
    has to be an easy method you are able to remove me from that service?

    Thank you!

    My website – Work Training

  40. I’ve been browsing online more than 2 hours today, yet I never found
    any interesting article like yours. It is pretty worth enough for me.
    In my opinion, if all site owners and bloggers made good content as you did, the net will be much more useful than ever before.

  41. I’m really impressed with your writing skills
    and also with the layout on your weblog. Is this a paid theme
    or did you modify it yourself? Either way keep up the
    nice quality writing, it is rare to see a great blog like this one today.

  45. Does your website have a contact page? I’m having trouble locating
    it but, I’d like to shoot you an email. I’ve got some ideas for your blog you might be interested in hearing.
    Either way, great website and I look forward to seeing it
    grow over time.

    Feel free to surf to my web blog Situs Judi

  47. An outstanding share! I’ve just forwarded this onto a co-worker
    who has been conducting a little research on this.
    And he actually bought me lunch because I stumbled upon it for him…

    lol. So allow me to reword this…. Thank YOU for the meal!!
    But yeah, thanx for spending some time to discuss this matter here
    on your web site.

Comments are closed.