Scalable Angel Funding Framework – Investment Structure<br />Objective: To provide an angel funding template for large scale financing of early stage businesses. These businesses might be good cash flow businesses, and many times, may lack the potential to scale into exitable companies in a short timeframe.<br /><ul><li>Desired CharacteristicsVCDebtPreference mechanism i.e. investor make returns before promoters doInvestor upside uncapped – equity style return potentialLow investment management overheadNo collateral from Entrepreneurs i.e. genuine risk capital to the businessAddress investor returns even in case of lack of liquidity or scaleGenuine risk financing – one in two business may fail</li></ul>Proposed framework:<br /><ul><li>Investor extends a certain amount (A) to the company as debt at % monthly compounded interest, and a  year moratorium on payments. The interest rate may be varied based on risk perception and probability of the company to generate capital returns (see below).
After  year, the company must pay interest due monthly, and part principal, to the extent of at least % of monthly revenue. It might pay more if it can at its discretion. For example, if the investment is 10 lakhs at 2% monthly interest (i.e. 20,000), and the business is making Rs 3 lakhs of revenue per month, it must repay Rs 30,000 a month (Rs 20,000 against interest and Rs 10,000 against principal to start with).
This debt will have typical debt covenants and charges on the business.
In addition, the Investor gets warrants to purchase an equivalent amount (A) worth of shares of the company, as per share price determined at a pre-agreed valuation level (B). The Investor is entitled to typical shareholder protection rights. The warrants are valid for next  years.
The board seat and other “value add” that the Investor could bring in can be individually negotiated, but are not necessary to protect basic investment interest of the Investor. Investors may also decide to selectively engage deeper with companies where they see more upside potential.</li></ul>Scenarios:<br /><ul><li>The company tries and fails to get off – Investor loses the debt investment since the company doesn’t have ability to pay. The warrants never get exercised since they are worthless.
The company builds some revenue base, but doesn’t break out – The investor gets interest and debt repayment. The warrants may be exercised, or not, depending on Investor choice – but will eventually expire if not exercised.
The company breaks out – The Investor makes a preferred return equivalent to the interest rate, and then can capture the upside by converting the warrants (and paying for that equity). The overall effect would be similar to a participating preferred structure in conventional venture termsheets.