Angel collusion: It's not necessarily a bad thing

September 29, 2010: 1:40 PM ET

Would the start-up world be a better place if some of Silicon Valley's biggest investors worked together?

In the wake of "AngelGate," a lot of heated words, emails and tweets have been exchanged. Did 10 tech super angels convene for dinner in San Francisco last week to discuss how they could band together to fix prices and keep other entrepreneurs out, as Techcrunch reported? Which early-stage investors attended and what did they discuss?

At this point, it doesn't really matter who did what, where, and with whom. But the speculation raises a valid question: What if tech angels -- dare I say the shameful word -- "colluded"? If their intention was to drive away competition, that's arguably illegal. But certain forms of collaboration are not only legal, they could even be beneficial for the parties involved.

As it stands, it can be extremely difficult for new angel investors to get into the investment game with tech start-ups and go toe-to-toe with heavyweights like Ron Conway, Dave McClure and Chris Sacca. There are no actual standards of practice in place for early-stage investing -- only practices which are clearly taboo (ie. price-fixing). As such, angels can pretty much dictate terms and conditions as they choose, and term sheets -- which are usually binding investment offers -- can vary wildly with regards to the number of variables and the content of those variables.

That kind of freedom and flexibility can be empowering if you're a pro, but it can also be confusing and intimidating, enough to scare off interested entrants altogether.

"If you want to write your own term sheet as an individual angel, you're a dead man," says Paul Kedrosky, investor and editor of the Infectious Greed blog. Though it may be relatively easy as a new entrant to assess a start-up's business model and management, dealing with the dense financial clauses and conditions in a term sheet can be daunting. An individual investor or a small group of investors, unlike a venture firm, may not necessarily have the resources to figure out how they might be at a disadvantage as compared to other potential investors. And unfortunately, actual term sheets are never publicly disclosed, so angels hoping to look to reference documents are out of luck.

Kedrosky argues that angels could and should work together towards implementing more standardized investment term sheets, which he believes should include a convertible note with a cap on it. Such a template would arguably alleviate transactional friction, decrease the time and cost involved in these deals, and eliminate a lot of the gamesmanship that often goes on with regards to say, terms that might ostensibly give a company more control. Such a template could also draw potential angels.

Start-ups would also stand to benefit, with fewer variables to pore over and less reliance on outside counsel. (Lawyers are paid by the hour, after all.) So the investment process for everyone is expedited and less painful.

Wishful thinking? Maybe. But offering a time and cost-effective industry standard tech term sheet that angels, super angels, and prospective entrants could all immediately sign onto would be just another classic example of lowering the barrier to entry in the marketplace, which is obviously, a good thing.

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About This Author
JP Mangalindan
JP Mangalindan
Writer, Fortune

JP Mangalindan is a San Francisco-based writer at Fortune, covering Silicon Valley. Since joining in 2010, he has written on a wide array of topics, from the turnaround of eBay to the evolution of net neutrality. A graduate of Fordham University, Mangalindan has also written for GQ, Popular Science, and Entertainment Weekly.

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