Does Angel Participation Matter? An Analysis of Early Venture Financing

Abstract:     
We examine the role of angel investors in early venture financing using a new sample of 182 Series A preferred stock rounds. Our sample includes deals in which angels invest alone, those where they co-invest with venture capitalists (VCs), and deals in which VCs invest alone. We find that investor composition is strongly related to control rights, and deals with more angel investors have weaker control rights. Regarding outcomes, among larger deals, deals financed by VCs alone are more likely to experience a successful liquidation event as compared to deals with mixed VC and angel investor compositions. Consistent with a possible role for conflicts of interest, we only observe this result when the board of directors is split and not firmly under the control of either common or preferred shareholders. Although deals financed by angels alone have average success rates, they are more likely to survive in a less active state without liquidation even after several years. Overall, we find that investor composition affects many aspects of early venture financing not yet documented by existing studies.

Number of Pages in PDF File: 46

Keywords: Venture Capital, Angel Investors, Entrepreneurship, Control Rights, Term Sheets

JEL Classification: G20, G24, G32

working papers series