Working to close a small angel investment prior to your incubator’s demo day usually falls somewhere between a moderate distraction and a huge pain in the asymptote. It’s not worth the effort to close during this time period for a small amount.
While angel investors usually let startups set the terms (convertible note, priced round, etc.), this choose-your-own-adventure works against you prior to demo day.
Rather than focusing on matters related to the incubator program, shipping code or closing on customers immediately prior to the pitch of your life, you end up spending time with your lawyer discussing things like the pro’s and con’s of a convertible debt round versus a priced round, series seed versus series aa, price caps and liquidation preferences. Then more time with the potential angel investor. Then time with your lawyer. Rinse and Repeat.
While I love talking about the mechanics of price caps and liquidation preferences, I’m not thrilled about discussing them with you two weeks before demo day…especially if the angel investor is investing a small amount (e.g. $20k or less).
Sure, your startup can set up the convertible debt round for “Up to $500k” and close on the small amount of financing with the angel investor prior to demo day. But what happens when a new investor wants to invest $125k, with some changes to the terms of the offering? At best, your startup will have to amend your current transaction documents which just adds to total transaction costs.
Some startups find value in closing a small piece so they can have a slide at demo day that says “We’ve closed on $X,000 of funding of our $Y,000 round”. While this type of slide may seem to signal momentum, be careful as it may also signal that your startup is having difficulty closing the round. Especially if your round is less than 50% closed.
Prior to demo day, if an angel investor is bringing a small amount of financing, obtain no more than get a verbal commitment to invest. It can be painful to hold off on getting some capital to extend your runway a couple more months, but if you lose a potential angel investor over the course of 2 weeks, then that angel investor probably wasn’t going to invest to begin with…or not until someone invests a significant amount.