So, Paul Graham is a brainiac. He is a partner in a pretty much exclusively software seed stage fund, Y Combinator that you can read more about.
He writes challenging essays at paulgraham.com (8 million hits it says!) that are very thought provoking. Read Want to Start a Startup? carefully.
It's refreshing to see several of these ideas in print. For instance:
1. ...A way to fund a startup is to get a job. This frequently starts as consulting - which is how RTMS, Inc. started. We worked all day building market strategies for customers while we tried to embody our expertise on software that would expand the company's reach. (This was 1989.) Interestingly, the consulting business remained and is a mainstay even today. They got better and better as the software application got more capable. There's hardly a major US retailer they haven't worked for.
2. Some angel groups charge you money to pitch your idea to them. Needless to say, you should never do this. Amen.
3. One of the dangers of taking investment from individual angels, rather than through an angel group or investment firm, is that they have less reputation to protect. I've seen that more than once, but I thought I was the only one talking about it. The flip side is true, too. Individual angels can get sucked into situations that a group's experience might have avoided.
4. Angels can allow founders to partially cash out if they choose to. It's true; we've done this once. It is very unusul and I wouldn't do it very often, but it's a possibility.
5. Angels who only invest occasionally may not know what terms they want. Paul goes on to develop the story of "vanilla" documents prepared by the angel's attorney. When this happens, (due in part to the need to keep fees low) things get both left out and included that later wisdom will suggest should've been included or left out. Groups tend to use more standard terms and -- more important -- develop an understanding of what they really do want.
6. Like VCs, one of the advantages of seed firms is the advice they offer. But because seed firms operate in an earlier phase, they need to offer different kinds of advice. Good angel groups, too. That advice is often both technical and srtructural. Groups don't all do this. Be sure and ask - for examples, not intentions.
7. ...the disasters of the Bubble showed that generic business guys don't make such great CEOs (in reference to replacement of founders.) Yup. Been there.
8. Angels like to invest in deals that come to them through people they know. Absolutely.
9. ...being slightly underfunded teaches them an important lesson: cheapness is power. A low burn rate is a pearl of great price. It provides lots of options that high burn rates take away. In Paul's words "Spend little, and work fast."
10. ...vesting (of founders stock) is a way for founders to protect themselves from one another. It solves the problem of what to do if one of the founders quits.