Investors are people too. They evaluate you like you should assess a possible co-founder or first employee. What are your credentials? What have you done that would convince me that my money is safe in your hands? Only after they see you as fundable, do they want to assess your plan for fundability, not the other way around.

Even with great credentials, it is all too possible for an entrepreneur to come across as a high risk investment. Here are some “rules of thumb” that indicate a marketable and experienced entrepreneur:

• Highlights team strengths, more than his own. Some entrepreneurs seem to never stop talking about themselves, and all their accomplishments. The best ones talk more about how they have assembled a well-rounded team, and will continue to fill in the gaps.

• Talks about the implementation plan, not the idea. Most entrepreneurs are great at envisioning their business idea, but the implementation is fuzzy. Experienced entrepreneurs talk about their implementation and rollout plan, with real milestones and quantifiable results.

• Customer needs and benefits first, then product features. The best entrepreneurs show that their market domain knowledge is as strong as their product technology knowledge. They are able to weave their solution into the market, the opportunity, and customers, in a way that sounds like a natural fit, rather than a product sales pitch.

• Focus is clear, not all over the map. Success means the entrepreneur must be laser focused on driving the business, passionate about a product, and passionate about a specific set of customers. If the business plan reads like a smorgasbord of offerings, there are probably not enough resources to do any well, and customers will be confused.

• Rational business model, with prices and volumes. Unless the business is a non-profit, the entrepreneur needs to show how he will make money. The days are gone when investors want only to see a large market share or growth in eyeballs. Are revenues and costs reasonable and projected for five years?

As an entrepreneur, don’t let your ego get in the way, or believe you can take the world on by yourself. If you want to attract investors, you must be willing to listen and work with others, as well as share your ideas or your knowledge. Loner entrepreneurs won’t get their foot in the door with any investor I know.

If you are young or inexperienced, and don’t have business credentials yet, don’t hide this fact. I recommend a proactive approach, to highlight the accomplishments you have, the power of other team members, and show some humility in admitting a search for the rest of the team.

So you might ask, how do first-time entrepreneurs ever get the funding they need to prove that they can perform at the next level? The best answer is to team yourself with someone who has “been there and done that.” After a team success, you’ll find all members are “promoted” to the next level.

Another common approach is to bootstrap your first startup to success, possibly with some help from friends and family. As I said in the beginning, investors are people too, so get out there and make them your respected business friends before you try to sell your idea. Business networking is not the same as cold calling with a hard sell.

Every investor knows a few good entrepreneurs, like Marc Andreessen of Mosaic and Netscape fame, who can get millions of dollars of funding for just about any idea, but I don’t know one investor who has funded a “million dollar idea” without regard to the person and the plan behind it. Think about that the next time you pitch your idea.

As a member of the local Angel group selection committee, I’ve seen a lot of startup presentations to investors, and I’ve never seen one that was too short – maybe short on content, but not short on pages! A perfect round number is ten slides, with the right content, that can be covered in ten minutes. Even if you have an hour booked, the advice is the same.

I’ve published these points before, but based on interest, it’s time for an update. Remember the goal is an overview presentation that will pique investor interest enough to ask for the business plan and a follow-on meeting, not close the deal on the spot. If you can’t get the message across in ten minutes, more time and more charts won’t help.

Every startup needs both a business plan and an investor presentation, completed before you formally approach any investors. The approach I recommend is to build the investor presentation first, by iterating on the bullets with your team, and then fleshing out the points into a full-blown text-based business plan document. Here are the ten slides you need:

1. Problem and market need. Give the “elevator pitch” for your startup. Explain in analogies your mother could understand, and quantify the “cost-of-pain” in dollars or time. Fuzzy terms like “not user-oriented” or “too expensive” are not helpful.
2. Solution product & technology. Here is how and why it works, including a customer-centric quantification of the benefits. Make sure to communicate the relevance of your product / services to market needs. Describe your technology patents and “secret sauce”.
3. Opportunity sizing. Define the characteristics of the overall industry, market forces, market dynamics, and customer landscape. Investors like $1B markets with double-digit growth rates. You need data from industry experts like Forrester or Gartner for credibility.
4. Business model. Explain how you will make money and who pays you (real customer). In this section, you need to be passionate about recurring revenue, profit margin, and volume growth. Implicit in this is the go-to-market strategy.
5. Competition and sustainable advantage. List and position your competition, or alternatives available to the customer. Highlight your sustainable competitive advantages, and barriers to entry.
6. Marketing, sales, and partners. Describe marketing strategy, sales plan, licensing, and partnership plans. Here is also a good place for a rollout timeline with key milestones. Make sure your marketing budget matches the scope of your plan.
7. Executive team. Qualifications and roles of the top three executives and top three on your Board of Advisors. They need domain knowledge and startup experience. Highlight their level of involvement, and quantify their skin in the game.
8. Financial projections. Project both revenues and expense totals for next five years, and past three years. What is the current valuation of the company? Show breakeven point, burn rate, and growth assumptions.
9. Funding requirements and use of funds. What is the level of capital funding sought during this stage? What equity is the company willing to give in return for the investment? Show a breakdown of the intended uses of these funds.
10. Exit strategy. What is the timeframe of return on investment? What is the planned exit strategy (IPO, merger, sale, including likely candidates)? What is the timeframe for the exit? What is the rate of return expected for the investor?

Hand out copies of the slides before the presentation for note taking, with proper cover sheet, with brochures, product samples, or other marketing material you may have. Offer to do a demo later, but don’t try to squeeze it in the presentation.

My last recommendation is practice, practice, practice. The CEO should give the pitch, and prepare by playing “presidential debates” – asking your team to be the opponents, and check you on timing. Investors hate long rambling presentations. Show some energy and enthusiasm, and remember if you lose their attention, you have lost the deal. Have fun!

If you are new to the entrepreneurial world of startups, you are likely confused by the terminology of seed-stage, lean startups, micro-VCs, and Super Angels. Don’t be embarrassed, since even professional investors are often confused these days by the new terms, as well as old terms used with new meanings. In any case, it’s time to look again at the options you really have.

A while back I heard a talk by Dave McClure, a long-time angel investor, who also proclaims to be one of the “new breed” of venture capitalists in Silicon Valley, as CEO of 500Startups, which is either a micro-VC seed fund, or a startup incubator, or both. The good news is that he is all about helping early-stage startups, the hard part for entrepreneurs is figuring out what it takes to play.

Here is just a sampling of the latest terminology and lingo that I gleaned from Dave, and from some additional research on the Internet, that I think every entrepreneur should know, who may be looking for funding now, or down the road:

• Micro-VCs. These are emerging group of professional investors (venture capitalists, ala VCs), who are investing from a fund of other people’s money, with a particular focus on seed-stage startup opportunities. Seed-stage means promising companies that don’t yet have a revenue stream, and may not yet have a proof of concept.
• Super Angels. These are angel counterparts to VCs, who traditionally only invested their own money, but now have begun raising funds from outside investors, to do more than a few deals per year. Like most angels and micro-VCs, however, they still start with relatively small sums of money, often investing only $10,000 to $50,000 in the first increment.
• Series-seed round. Since the economic downturn started, neither angels nor VCs have given much attention to startups without a product and a revenue stream. That was left to the realm of friends and family. In the last year, there has been a resurgence of interest, some say a bubble, by both angels and VCs, in a pre-Series A kicker to identify promising startups with seed funding, before major equity has been given away.
• Early-stage startup. Every startup is early-stage to someone. For a startup founder, this stage is when the “big idea” has become a passion for him, but he hasn’t written anything down yet. For angel investors, early-stage means there is a good business plan and maybe a prototype, but no customer revenue. For VCs, early-stage means customer revenue is less than $10M. Thus the more precise term these days for early startups is “seed stage.”
• Business accelerator. This term is replacing “startup incubator,” which is a facility provided by an individual, university, or local community for any new startups to congregate for almost no cost, with the hope of learning from each other. The business accelerator model is YCombinator and TechStars, who select only the best applicants, have a demanding process, provide experienced coaching/mentoring, some seed funding, with a required exit in about six months. Incremental investment may follow.
• Lean startup. This is a concept coined (and trademarked) by Eric Ries a couple of years ago, primarily for software and web applications. Lean startups operate on minimal money, an open source environment, and assume multiple iterations, with customer feedback, to get it right. A popular phrase heard in this environment is “rinse and repeat.” Today, if you do well in this mode, you will get funded if and when you need it.

Overall, the biggest issue for early-stage startups still is funding – how much should you expect, who provides it, and how much of your future company should you give up to get it? The trend for investors, including micro-VCs and Super Angels, is to place “lots of little bets,” ($10K to $50K) with milestones applied, which can then lead to incremental and larger funding checks.

Pundits call this the “spray and pray” approach to funding. Even though significant deal vetting and filtering is performed by the investor teams running these seed programs, in effect, they spray little bits of capital onto as many good ideas as possible, help them along, and pray some eventually strike it big.

Despite these pundits, I sense a fundamental change in the early-stage financing eco-system. With the Internet and other powerful but inexpensive business tools, the cost of development and rollout of new startups is lower than ever before, so the “big bang” theory of funding no longer makes sense. This should be a wake-up call for traditional entrepreneurs and investors alike.

The naïve entrepreneur thinks he can relax, after he finally cashes the check from a professional investor, but in reality that’s when the work and the pressure starts. His first reality reset is that now, maybe for the first time, he really has a boss, or several bosses, and often very demanding ones at that.

Angel and venture capital investors rarely just give you the cash, and stand back to wait for you to spend it the way you want. First of all, they are usually more experienced than you in your own business domain, so they have strong views on what it takes to succeed, and probably would prefer it done their way.

Secondly, they probably didn’t give you all the money up front, but made a good part of it contingent on meeting some milestones. Your startup is now part of someone’s portfolio, and here are a few of the ways in which you should expect to be monitored by your investors:

1. One or more seats on the Board. Maybe you had an informal Advisory Board before, but now you have a formal Board of Directors. That means you shouldn’t expect to make any strategic decisions or pivots without their approval. You should also plan for a formal presentation to the board each month, with many communications in between.
2. Manage to documented milestones. A normal part of a funding agreement is a set of accomplishments, with dates, that you are expected to achieve in order to remain in good standing and qualify for remaining distributions. These are not optional suggestions, so treat them as management objectives that will get you fired if you don’t perform.
3. Personal visits from key investors. Both angel investors and venture capital partners like to make personal visits to your facility or a regular basis, sometimes unannounced, to see how the business is running. You should expect to personally host these visits, and openly answer any questions or concerns that are raised. Do not delegate.
4. Number of proactive contacts from you. In addition to the visits, every investor expects to be contacted and updated proactively and judiciously on key decisions or issues. A quick way to lose investor confidence is to always wait for the investor to call, or inversely to call the investor incessantly for every minor decision.
5. Access rights to operational information. All investors have information rights which are detailed in the shareholders rights agreement. These are usually extrapolated to mean they expect you to share key operational data, such as the sales pipeline, vendor discussions, and quality issues, at any time. Don’t keep secrets from your investors.
6. Extra focus on cash flow. Remember, it’s their cash, so treat it like gold. Because you now have money in the bank, now is not the time to lease a lavish office building, or travel around the world first-class on company business. Pinching pennies like you did in the early days is still the only approach.

It is also to your advantage to keep track of how your company performance compares to others in the investor’s portfolio. You may think you are doing well, but if your numbers put you at the bottom of their ranking, you may need to decide that taking more risk is better than the risk of being cut from the pack.

On the other end of the spectrum, if you are one of the top performers, a VC may “encourage” you to take big risks and swing for a home run, even when a base hit or double would be a smarter move from your perspective. In other words, you no longer have full control, and you don’t need any surprises, just like the investor doesn’t want any.

The simple fact is that your whole world as an entrepreneur changes when you take someone’s else’s money, as outlined by Francine Hardaway in an earlier article. Do it with your eyes open. Investor relationships are like social relationships – sometimes it’s better to be alone than to wish you were alone.

If your startup is great enough to get a term sheet from angel investors or a venture capitalist, the next step for the investor is to complete the dreaded due diligence process. This is the last step of the process, where surprises in the evaluation of the management team, documentation, and personnel problems can derail the investment.

Some startups do nothing to prepare for the due diligence process, assuming the people and business plan documents will speak for themselves. Others stage elaborate “training” sessions, to “assure” that everyone tells the same story. The right answer is somewhere in between.

I believe that proactive preparation for due diligence is a bigger job than the work for investor meetings, because your whole team is involved, not just you as the CEO. If there are financial anomalies, or someone on the team doesn’t know the current strategy, or is unhappy with you or the company, the investment will be jeopardized.

Even if you feel that all is well, here are some thoughts and actions I would strongly recommend:

• Whole team must know the plan. Make sure the Business Plan and all related documents are current, synchronized, and in the hands of every key employee. If everyone gives a different story, you have no story.
• Personnel situation is stable. Ask everyone to update their resume, and personally call probable references, so there are no surprises. You need to brief the investor ahead of time if there are career anomalies or personnel situations that could be a problem.
• Don’t surprise the team. Call a company meeting to communicate what is happening, and why. This is a good time for the CEO to present the final investor charts, and answer any questions from employees. All need to know who will be there and what you expect.
• Contact key vendors and existing customers. Explain that they may be called, and use the opportunity to check their satisfaction with your company and your product. Again, if you find problems you can’t fix, be up-front with the investor to avoid a surprise.

Depending on the availability of staff and needed information, the due diligence process generally takes 2–6 weeks to perform. During this time or earlier, you should also be doing your own due diligence on the investor, as suggested in a recent article on avoiding problem investors.

Here is a quick summary of the priorities normally covered by the due diligence process:

1. Evaluation of key players. This is the highest priority item. As a starting point, an investor will ask for resumes of the “key players,” and will then follow-up to verify that executives are experienced, honest, and committed. That means questioning each of these key players, and calling references or prior associates.
2. Validation of product. This will cover the technology, the current state of development, and customer satisfaction. Is it something consumers need or simply want, does it work, and is it ready to ship? What are the “kinks” or certifications that need to be resolved? If the product is in customer hands, expect some customers to be interviewed.
3. Size of the market. Having a great product or service is not enough. One of the criteria for a good investment is a large and fast growing “potential market.” Investors will talk to their own experts on the size of the potential market and the expected growth rate. They will also assess trends in the market and how current economic, political, and demographic conditions relate.
4. Sales and marketing strategy. This will involve an analysis of the company’s distribution channels, advertising, and pricing strategy. An investor will try to get an independent reading on competition, barriers to entry, price sensitivity, and what percentage of the market your company can expect to capture.

Remember, once investors contribute money to a company, a long-term relationship is created. Unlike a marriage, however, it may be very difficult, if not impossible, to get a divorce. Your objective is not only to survive, but also to make it an enjoyable win-win relationship.

If you are new to the startup space and angel investing, you probably don’t realize that some groups of angel investors charge entrepreneurs a fee to pitch to their groups. This practice has caused a rousing debate among key players, with some calling it a scam, and others defending it as necessary to cover expenses.

Jason Calacanis, a well-known entrepreneur and angel investor, opened the debate about a year ago in a strongly-worded article on his blog which attacked the practice on ethical grounds, and called out popular angel groups charging fees ranging from several hundred dollars to $5,000 or more. He calls these a scam, and “angel group” payola.

Others, including noted angel David S. Rose, head of the New York Angels and Angelsoft, have spoken out in defense of the practice, at least for smaller amounts, commenting that, aside from covering expenses, it also provides a degree of “filtering”.

While I’m definitely a proponent of full disclosure to prevent surprises, I see nothing wrong with experienced investors charging a fee for listening and evaluating startup proposals, and providing feedback (or funding) to entrepreneurs to help them achieve their objectives. Lawyers and other professional consultants have done this for generations.

I have long recommended that entrepreneurs do their own “due diligence” on potential investors and angel groups before they waste their time and hard-strapped funds, and here are some additional thoughts for entrepreneurs thinking of paying to pitch their case to investors:

• Be realistic about expectations of funding success. According to the latest data from AngelSoft, only about 3 out of 100 companies who initiate the formal funding request to angel groups actually get funded. Entrepreneurs who expect to get a hit the first time (or first five times) they pitch their story cold are likely to be disappointed.

• Improve your odds by networking and warm introductions first. With the rise of social tools, potential investors are increasingly more accessible outside the pitch room. If they know you by a warm introduction from a friend well before the pitch, or you have one or more advocates in the room, your odds of success go up dramatically.

• Evaluate feedback from individual investors first. If you have been given private introductions, but the investors declined to hear your pitch, don’t assume that paying money or presenting to larger numbers will solve your problem. There is probably a fundamental problem with your business or how you present it. Find and fix that first.

• Weigh the cost against the track record and “reach” of a specific angel group. A fair question to ask any angel group, fee or no fee, is “What is your track record of funded investments, versus number of pitches?” Spending $1K to get $1M is usually better than spending nothing to get nothing. Does their “sweet spot” match your type of business?

• Consider your startup stage. If you’re in seed-stage with young, first-time founders, and think you’re ready to raise some capital, your odds of funding success are so low that I would skip the fee alternatives. On the other hand, if you have solid revenues, good growth, and need to scale faster, it may be worthwhile to get to the best angels in town.

• Don’t wait until you are desperate. Investors can spot an out-of-money entrepreneur a mile away. They won’t even notice that you are angry because you had to pay for the opportunity, and they won’t fund you on principle, since it doesn’t appear that you can manage your plan very well.

I’m convinced that most angel investors are not out to squeeze a dollar from poor cash-strapped entrepreneurs, as implied by Jason. They are, however, always looking for better ways to make use of their time, and quickly find the entrepreneurs who have the best case and the least risk. Their only real gain is from a win-win situation, and it’s up to you to take the right first step.

A few angel investors have slipped or fallen from their lofty perch, so entrepreneurs must take great care to validate the character and reputation of every prospective investor. The entrepreneur’s tendency to be in a huge hurry to obtain the funding can end up being disastrous, and play into the hands of these less scrupulous investors.

Many entrepreneurs believe all money is created equal. As long as somebody recognizes their million dollar idea and writes them a check, the source really doesn’t matter. In fact, most angels are pure, but there are some exceptions that may cost you more than an investment:

1. Shark angels. This is the ultimate bad guy whose sole intention of getting involved in early-stage investing is to take advantage of what they believe is the entrepreneur’s lack of financial and deal-making experience. If the term sheet process turns to pure torture, it may be time to respectfully bow out.
2. Litigious angels. The litigious investor will look for almost any excuse to take you to court. This type of investor never really focuses on the returns your company can deliver, but instead tries to make money by intimidation, threats and lawsuits. They know you won’t have the resources to fight them, so they count on you “caving.” Keep your attorney close by your side.
3. Superior angels. A number of successful business people, some of whom become angels, develop the belief that they are destined for greatness because of their clear superiority over everyone else. These are usually overbearing, negative people who are hypercritical of every decision you make. Don’t be intimidated into bad decisions.
4. Control freak angels. This angel starts out looking like your new best friend. Once you are funded, he waits until you hit your first pothole and then points out “gotcha” clauses in your agreement that give him more control. This escalates into a requirement that he must step in to run your company himself. Only your Board can save you here.
5. Tutorial angels. The tutorial investor is not after control, but wants to hold your hand on every issue. The mentoring offer always sounds good up front. But after they write the check, it soon becomes apparent that their desire to be helpful 24 hours a day is a nuisance at best. Initially, your gratitude for their investment may prompt tolerance, but eventually the burden wears you down. Keeping your distance is the best solution.
6. Has-been angels. These tend to appear with every perturbation in the economy. They are usually high-flyers with a liquidity problem. They are still at the country club every day, but are now running up a tab. They will meet with you, and ask a thousand questions, but never get around to closing the deal. Learn to ask the closing questions.
7. Dumb angels. Wealth is not synonymous with business savvy. You can spot dumb angels by the questions they ask (or don’t ask). If they ask superficial questions or don’t understand business, a successful long-term relationship is not likely. But don’t forget that people with wealth usually may have some savvy friends to meet.
8. Brokers posing as angels. These people are all over the place, often posing as lawyers and accountants. They have little intent to invest in your company, and will eventually solicit you to sign a fee agreement to pay them to introduce you to actual investors. Brokers are often worth the fee, but don’t be misled about who is the angel.

How do you avoid most of these? Whenever possible, only accept investments from individuals in credible, professional angel investing organizations – not people who solicit you. Even then, do your own due diligence in the business community. Ask what other companies they’ve invested in, and talk to the CEOs of those companies to find out what kind of investor they’ve been.

Also, make sure your lawyer writes the initial investment document or term sheet – not the investor. This document should be standard for all your investors and not negotiated on a one-on-one basis. Watch out for any attempts to add clauses that can come back to bite you. Not all angels these days are even trying to earn their wings.

Most entrepreneurs have learned that it’s almost always quicker and easier to get cash from someone you know, rather than angel investors or professional investors (VCs). In fact, most investors “require” that you already have some investment from friends and family before they will even step up to the plate.

You see, investors invest in people, before they invest in ideas or products. Since they don’t know you (yet), their first integrity check on you as a person is whether your friends and family believe in you strongly enough to give you seed money for your new idea. If they won’t do it, they why would I as stranger invest in you?

Friends and family will likely not expect the same level of sophistication on the business model and financials as a professional investor, but they do expect to see certain things. Here is a summary of some key items to think about as an entrepreneur before approaching friends, family, or even fools:

1. Don’t be afraid to ask, carefully. If you set around quietly waiting for someone you know to offer you money to fund a startup, you will probably have a long wait. On the other hand, if you open every conversation with “I need money,” you won’t have any friends or any money. Practice your “elevator pitch,” and end it by asking for the order.
2. Be upbeat and respectful. Nothing kills everyone’s optimism and desire to help quicker than a negative or arrogant attitude. If they are going to put cash into your company, chances are that they will expect to spend a fair amount of time together, either helping you or certainly discussing progress. Nobody likes a downer.
3. Be passionate about the idea. Friends and family will quickly detect your level of sincerity and thought behind the idea. You need to convince them that you have been working on this vision for a long time, and have done the “due diligence” on all the potential knockoffs. Daydreams and “the idea of the moment” won’t get much respect.
4. Demonstrate progress and your own “skin in the game.” Saying that you need money to start is not nearly as convincing as saying that you have built a prototype on your own dime, but need more to roll it out. We all know people who can talk a good game, but never get around to building anything.
5. Ask for the minimum rather than the maximum. We would all love to have a million dollars of funding to “do it right” and build the company of our dreams. But your chances are minimal of finding someone who will give you that much to start. Set some milestones for three or four months out, and show what you can do, then ask for more.
6. Communicate the risks, and write down the agreement. Be honest with naïve family members and friends about the inherent risks of a startup – at least 70% fail in the first five years. Don’t take money from family or friends who can’t afford to lose it. Think hard about the consequences of a possible startup failure and the loss of their funding.
7. Show some incremental value along the way. Look for ways to get some traction with a minimal product, while you are still developing the main event. In high technology, this is called “release early and iterate,” which allows you to make corrections as you go, as well as adjust for the market changes. It also shows progress to early backers.
8. Network to build investor relationships before you ask for money. Having a real project, rather than just an idea, is a strong positive when networking for angels or VCs. Now you really have something to discuss, and real credibility as an entrepreneur. Build the relationship first, ask for advice on a real project, then maybe money later.

Overall, don’t think of friends and family funding only as a last resort. There are massive advantages, like sharing profits with friends and family, as well as the strategic credibility than can be gained from funding from someone you know, rather than from a professional investor.

I hope all of these points seem like common sense to you, and you wouldn’t think of handling it any other way. Yet, I’m continually amazed at how often I am approached as a professional investor by strangers asking for a million dollars to fund an idea, without hitting even one of the above points.

We can all recount horror stories of families and friendships torn apart by money lost on someone else’s speculative dream. In these cases both the entrepreneur and the funding partner are the fools. Don’t be one.

If your startup desperately needs an investor, you may not care if the investor is a so-called “angel” investor, or a venture capitalist (VC). The money is the same color in either case. But I have found that making the right choice at the right time can have a major impact on your long-term success, and the decision process is complex.

The basics are simple. Angels are typically high net-worth individuals, investing their own money, interested more in early or “seed” financing of amounts starting as low as $25K. Venture capitalists are professionals, investing other people’s money from a fund, interested mostly in later rounds, in chunks of money from $2M up. Between these extremes is a large overlap.

But beyond the numbers, there are many factual and subjective issues that you should be aware of before you step into the game. These include the following:

1. Investment control. Angels typically have simpler term sheets, don’t squeeze so hard on valuations, and are more realistic on time-frames. VCs tend to exert more control over the team and assert financial control over the company, its strategy and exit plans. Ultimately a larger VC investment can also narrow exit options.
2. Type of startup. Venture capitalists seek to fund businesses with the potential to be enormous. In addition, most venture capitalists want startups that have clearly defined economies of scale (such as software companies) vs. ones that scale linearly with some factor (such as service companies). Angels are less type-focused.
3. Expected return rate. Most venture capitalists tell you that they look for 30% annual return, or 10 times initial investment in 3-5 years. Another rule of thumb is a target of 50% IRR (a discounted cashflow calculation). Angels will look at lesser opportunities, but both recognize that many ventures fail, meaning the targets are high to improve the average.
4. Total money needed. I already mentioned that if you are looking for a specific raise of less than $2M, you are in angel territory. But it goes further than that. If the total money you’re looking to raise over the life of your company to be cash-flow positive is greater than $3M, or you will likely need money to scale, you need to work the VC territory.
5. Team experience. Successful serial entrepreneurs usually find it easier to raise money from venture capitalists. If you’re a first-time entrepreneur, that doesn’t mean you can’t raise VC money, but you’re going to find it more difficult getting VC traction.
6. Founder network. If you’ve never met a venture capitalist before and none of your colleagues have built companies with VC funds, you probably won’t get VC traction either. In contrast, if your best friend’s father is the CEO of a Fortune 1000 company, you might readily find a valuable set of angels.
7. Value-add. This is the most debated, but most important item. The value-add of both angels and VCs is totally dependent on the individuals involved, but on average VCs are likely to add more value than angels. They focus on specific business areas, have multiple deals running concurrently, understand deal flow, and usually have more current insights, connections, and resources.

Personally, I think it all comes down to the investor fit and the stage of the start-up game you are in. It’s definitely better to have people who have built businesses on your side. If you plan to exit in the near future, it’s important to have investors who have backed high-growth businesses.

For all cases, relationship is the key ingredient to a successful deal. It is very important to be able to communicate with your investors openly and honestly. If they respect and trust you as a person and you respect and trust them, it will be much easier to weather the inevitable storms. It’s easy to take any money that’s green, but in the end it can be more costly than it’s worth.

One of the first tough decisions that startup founders have to make is how to allocate or split the equity among co-founders. The easy answer of splitting it equally among all co-founders, since there is minimal value at that point, is usually the worst possible answer, and often results in a later startup failure due to an obvious inequity.

Another common “failure to start” situation I see is one where the “idea person” insists that the idea is 90% of the value (and 90% of the equity). In the real world, the “idea” is a very small part of the overall equation. A startup is all about “execution” – meaning the equity should be allocated based on the value that each partner brings to the table in each of these dominant variables:

1. Experience running a startup business. Running a new business starts with building a solid and credible business plan, working the investor funding process, and building an organization from nothing, with minimal resources. Successful Fortune 500 executives need not apply, since most would not have experience with any of these tasks.
2. Domain expertise and connections. If you are recognized as an expert in the business area of your startup, with a good reputation, and you know all the key vendors and customers, your value is huge. Building a product doesn’t get it distributed and sold. Expertise can be marketing, technical, financial, or sales.
3. Pre-existing intellectual property. Ideas are not intellectual property, until they have been converted into patents, trade secrets, trademarks, or copyrights. In many cases, one founder has started earlier and brings an important completed piece of work to the table, and that can have great value.
4. Sacrifice and time commitment. A part-time commitment, while holding down a “real” paying job, is obviously not the same as a full-time executive role, especially if the cash compensation is nonexistent, deferred, or at high risk.
5. Funding. Providing the major funding source for an early-stage startup is a totally different dimension, but it usually trumps all the items above in demanding some equity. For purposes of commitment and business decision making, I always recommend that execution partners retain control of at least 50% of the equity.

An arbitrary, but perhaps rational equity factoring approach would be to assign each of these five items as 20% of the total, and allocate equity based on each partner’s relative contribution to each. For example, if your rich uncle is providing all the initial funding, but has no active business role, it might be smart to offer him a 20% slice of the pie.

Equity allocation is usually the first point in a startup where outside help should be considered (legal counsel, potential investors, startup advisors), as they may be able to provide experience and more importantly, an unbiased view that the entire team can trust.

An important key is NOT to dodge the discussion up front, come to some agreement quickly, and write it down. If you and your potential partners can’t get through this discussion in a timely fashion and come to agreement, then it’s unlikely that your startup can ultimately survive anyway. Startup decisions only get harder later, never easier.

Even still, regardless of the initial equity split, you should seriously consider vesting your founders shares over at least two years. This means they will be meted out month-by-month, and a partner who changes his mind or defects early will not walk away with half the company.

The next big challenge for a multi-partner startup is the allocation of roles. Who will be the CEO, CFO, and CTO? The same variables apply, but here skills and experience are paramount. If you are an inventor and have the key patent in hand, that doesn’t mean you should be CEO. Of course, holding key assets and money always provide leverage to management rights as well as economic rights.

All partners should never forget that their allocated shares are only the beginning, and will be diluted proportionately when outside funding is later required from angels or venture capitalists. Investors will be quick to remind you that a small percentage of something is worth more than 100% of nothing. The same logic applies to splitting equity with co-founders.