Darian Ibrahim of University of Arizona has posted The (Not So) Puzzling Behavior of Angel Investors on SSRN. The article seeks to explain the differences in governance structures for angel-stage startup firms when compared to governance terms demanded by venture capital investors. Ibrahim suggests that investor motiviation, degree of trust, and the anticipated need to accomodate future venture investments help to explain the dichotomy. Here is the abstract:
Angel investors fund start-ups in their earliest stages, which creates a contracting environment rife with uncertainty, information asymmetry, and agency costs in the form of potential opportunism by entrepreneurs. Venture capitalists also encounter these problems in slightly later-stage funding, and use a combination of staged financing, preferred stock, board seats, negative covenants, and specific exit rights to respond to them. Curiously, however, traditional angel investment contracts employ none of these measures, which is a marked departure from what financial contracting theory would predict. This article explains this (not so) puzzling behavior on the part of angel investors, and also explains why some angels are moving toward venture capital-like organization and adopting venture capital-like contracts in the process.