Troughs in the economy are often often the best time for angels to make investments, said DLA Piper partner Jeff Leavitt. That’s apparently the thinking used by angels who have invested in Purewire Inc.
Leavitt represented software maker Purewire
this month in negotiating the terms of a $2 million investment from a group of angel investors. The angel group was led by Imlay Investments of Atlanta.
Angel investors, also known as seed investors, typically make investments of $2 million or less. Angels put their own personal money into companies; in comparison, venture capital firms invest money raised from outside sources.
In exchange for the investment, angels typically get a seat on the company’s board and preferred company stock along with voting rights. Lately, however, Leavitt said the angel investors with whom he’s negotiated have received convertible debt in the company, instead of preferred stock. That’s what happened in the Purewire transaction – the investors received a convertible note instead of stock.
“The benefit with convertible debt is that you don’t have to price the deal,” Leavitt said. “Usually for an angel, the company is too new for the angel to put a valuation on the company.”
With a convertible note, you can defer the valuation negotiation” until a later round of financing when the company raises equity, Leavitt said. Convertible debt also provides a benefit to the target company, because they don’t have to put a value on their assets too soon, he said.
Leavitt said he’s closed several angel-investment deals lately because of the downturn in the economy, rather than in spite of it. That’s because angel investors know they could reap a larger return when the market rebounds.
“A lot of the best returns on angel investments historically have been made in downturns,” Leavitt said.
Purewire makes software used to provide Internet security for businesses. Along with its $2 million investment, Atlanta-based Purewire said that it also named former Internet Security Systems CEO Thomas Noonan to its board.