With Christmas only days away I thought I would give an acknowledgment to a very extraordinary group of individuals that work behind the scenes of many businesses. These individuals, referred to as “Angels,” furnish growing enterprises with needed capital and expertise for expansion and development. In the process angels have created jobs, wealth and the potential for prosperity for countless small business owners and communities.

Angels allegedly first appeared in New York City over 100 years ago. These first Angels assisted with financing diverse local enterprises and civic endeavors. The term is a fitting one. Angel investors are often the only salvation for those without recourse to conventional financing and have saved many great ideas, businesses and real estate deals from the rocks of ruin.

While some Angel-deals are negotiated as joint ventures, limited liability companies or partnerships, Angels generally prefer an equity position in a corporation with a voice on the board of directors. In addition to the purchase of common stock, convertible preferred stock arrangements that allow for fixed dividend payments are also frequently employed. Because Angel investors are usually “first-in” following the company founders, they bear great financial risk. In consideration of this risk, they are capable of demanding a percentage of the company’s stock and future growth that is greater than subsequent investors are able to control.

Angels often require key positions within the company be filled by their people or “insiders”. Prior to funding, the company and Angel investor will establish strict performance guidelines for the operation and sales targets for the company. Because of their depth of experience in corporate matters and business growth, management teams lucky enough to attract Angel investors generally welcome the additional value of Angel expertise that comes with the capital infusion.

Structuring a deal with an Angel takes time. Be certain to begin with a well drafted letter of understanding; clear, concise financial statements prepared in accordance with generally accepted accounting principals and a realistic pro forma for future growth and operations. Before entering into a formal agreement, make certain you know what market terms are for similar deals; check references; consider non-disclosure and non-competition agreements and clarify limitations on endeavors that are outside of the ordinary course of business. Most important, make certain that your personality and goals and the personality and goals of your Angel are a good match because when these are in synch, the relationship can be heavenly!

Joint ventures are a form of strategic business alliance. A key difference of a joint venture from other business relationships is that the joint venture is typically entered into for a specific business purpose, usually for a limited time and only involving a limited subset of the participant’s assets.

Joint ventures formed as a legal entity such as a limited liability company (LLC) are often referred to as an “equity joint venture.” Use of a legal entity such as an LLC allows the parties to limit the liability of the joint venture to the assets pledged to the venture by the participants. Equity joint ventures are typically formed to conduct a specific business undertaking such as development of software or real estate; the purchase and management of assets such as hotels and shopping centers; or the marketing of specific goods or services.

“Contractual joint ventures” consist of contract-based alliances. An example of this form of joint venture would be a software developer licensing the right and obligation to a third party manufacturer to use the third party’s personnel, capital and facilities to manufacture and distribute software under a profit sharing plan.

In Washington, case law (citations omitted) provides that joint ventures are created by an express or implied contract; they do not arise by operation of law. The essential elements of a joint venture are: (1) a contract, express or implied; (2) a common purpose; (3) a community of interest; and (4) an equal right to a voice, accompanied by an equal right to control. An ownership or proprietary interest in the subject matter of the enterprise by all parties is not essential to creation of a joint venture. Other indicia of a joint venture include a right to share in profits, a duty to share in losses, and a joint proprietary interest in the subject matter. Parties have not formed a joint venture if their relationship is that of employer/employee or employer/independent contractor. Joint venture members are vicariously liable for each other’s acts, such liability being founded on the voluntary relationship that has arisen between the parties.

Because participants must rely on the willingness of the other third-party joint venturers to fulfill their obligations in order for the venture to be successful, joint ventures are not without risk. In addition to reliance issues, risk factors can also include the ability of the participants to accurately assess market opportunities and necessary amounts of capital and other resources required of the participants, and the ability of the participants to share vision, values and reasonable expectations. Undercapitalized participants may be “squeezed-out” of an otherwise potentially profitable venture by unscrupulous co-participants. Some of the risk inherent in a joint venture relationship may be mitigated by a well drafted letter of understanding and business plan prior to entering into a contract or forming the joint venture entity.