Perform Due Diligence on Potential Investors

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6. Build and maintain a relationship with the investor. According to David Brennan, the chief financial officer of venture-backed I Love Rewards, based in New York City, it's important to have chemistry with the associates and partners of a VC firm. Since the investors will be involved in crucial decisions, there has to be an element of trust and comfort. "Meet as many partners and people from the firm as possible," he says. "Build relationships with the partners. If your contact leaves, you want to work with someone who knows the company and has your best interests in mind." (See this recent story on what to do if your VC does leave.)

Now, here's my advice on angels:

1. When crafting the shareholder agreement, be extremely careful in deciding who controls what. For instance, if you give an investor veto rights over important decisions, such as on the approval of the next round of funding, this could be used later to pressure a company to provide better terms for him or her—or even get paid back on the investment.

2. Do a background check. A simple Google search can reveal helpful information, such as news stories about lawsuits or even criminal violations. Next, it's a good idea to conduct a routine credit and criminal check. There are a variety of helpful services, including HireRight.

3.If possible, try to focus on angel groups instead of individuals. These tend to be local organizations made up of 30 to 50 investors. On each deal, anywhere from 10 to 20 angels will invest. They will also share duties, such as due diligence and deal structuring. Instead of taking your chances with one person, these groups usually understand the investment process and have members who are qualified (in terms of financial background and startup experience).

4. Put the agreement in writing. Eugene E. Mueller, a deal attorney at Laguna Niguel, Mueller Carey Group, based in Laguna Niguel, Calif., recommends that angel investors sign an "investment letter." It should say that the investor has had access to company records/financials; is not buying shares to resell them; has not relied on outside representations not made in the letter; has read the investor documents; and understands the substantial risks involved and that he or she may lose the entire investment. For more, see my previous column on angels. Basically, the investment letter is a way to set the expectations of the investor. As much as possible, try to stress that growth companies are risky and can take years to produce a return.

It's extremely tough to raise capital now. As a result, it's tempting to take money from any source. But this can be a big mistake—there are just too many examples of entrepreneurs who end up with investors they don't like. Complaints run the gamut from constantly pestering and complaining to funding competitors to deposing the CEO. So be vigilant and ask questions. To be successful, you need investors who understand the opportunity and are patient.

Tom Taulli is a noted finance author and blogger.

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