Question
Angel investors take a much higher initial risk with any startup and for that reason they deserve to have a higher upside potential when compared to investors coming in the future rounds. On the other hand, entrepreneurs should not agree with the terms of a convertible note that will make it hard to raise money in the next round. What terms should a convertible note include so the angel investors, entrepreneurs and future round investors are happy?
Answer
Do not use a convertible note. Widespread as it's use is, what is critical is alignment of incentives between the parties.
Both should be clear with themselves and the other, what their target return is; for angels a multiple of the amount invested; and for founders the increase in net worth they seek as a result of the businesses success.
Fair has nothing to do with it. The word is a smoke screen for lack of hard thinking about whether or not there is a basis for a deal between the parties.
