Angels (people investing their own money) serve an important role in the life cycle of startup - they enable startups to take their first step in product development.  The venture community needs them.

However, the structures of angel investments vary greatly - and the wrong investment structure can make it more challenging for founders to raise venture capital.

In some cases, angels take common stock and in others they receive preferred stock.  At the highest level there are two sides to preferred stock: economic rights and control rights. While the economic rights assigned to angels are always a consideration for VCs, it is the control rights that can most affect a VC’s interest in investing.

Control rights broadly include board seats and the corresponding voting rights. Allocating these rights to individuals that are not professional investors or the management of the company can complicate key business decisions for the company, as angel investors may not have incentive alignment with the other parties. For example, angel investors with preferred stock may be compelled to pursue a small exit that does not maximize the value of the company or meet professional investor return expectations and may leave the founders with a minuscule payout after liquidity preferences are paid out.

It is critical to have proper incentive alignment amongst the members of the board of a company. As a result, entrepreneurs should do their best to avoid granting rights to angel investors that may discourage venture investors from participating.