The Value Multiplier to Only Raise Angel Money

After the post last week outlining an example value multiplier of 5 to raise VC money, an entrepreneur pointed out to me that some startups choose a middle ground between bootstrapping and raising institutional money: exclusively raising angel money. Comparing angel investors to VCs is relatively straightforward but there isn’t much talk about startups that only raise money from angels.

Only raising money from angels would be considered for a more capital-light business with the idea that there might be three rounds over five years raising amounts more modest than from VCs (e.g. $500k, $750k, and then $1 million for a total of $2.25 million). By raising money from angels it’s likely that there wouldn’t be the typical 1x participating preferred liquidity preference and that the angels wouldn’t require selling roughly 1/3rd of the company for each round (the 10-20% range would be more likely).

Let’s look at the math from purely a co-founder’s financial return for only raising angel money vs bootstrapping:

• As a co-founder you own 40% of the business with another co-founder that owns 40% and a stock option pool representing 20%
• At the end of five years you still own 40% assuming you don’t raise money and don’t have any dilution
• As a co-founder that owns 40% of the business, assume you raise three rounds of angel financing (roughly one every 18 months). Assume angels buy approximately 15% of the business with each round of financing and assume the option pool grows by 5% (less hiring with less money), so multiply the ownership stake by .8 (representing the amount sold to the angels and the amount for the new option pool). Here’s the math: .4*.8*.8*.8 which equals 20.5%.
• Assume everything else is equal, which it isn’t, the value multiplier to raise angel money is 2. That is, it makes financial sense to raise angel money if the business will be significantly greater than 2 times more valuable in five years.
• A quick example: if you can build a company worth $10 million with no angels, the same company would have to be worth $20 million for the personal gain to be financially equivalent.

Raising angel money, depending on the terms, is likely to be slightly more entrepreneur-friendly than institutional money, but still requires the full commitment of a board and other fiduciary responsibilities.

What else? What are your thoughts on the value multiplier to only raise angel money?