Do Angel Investors get paid before a successful exit?

We have a new startup and are trying to meet with some potential angel investors. We were asked if we have a ROI schedule. I thought that investors get paid only when the company has a successful exit but do some investors get paid back when the company starts making revenue? Kind of like a salary expense?

In a typical equity investment, an investor only gets paid when their shares are sold to someone else, like another investor, an acquirer, or on the open market. Angel investment is usually either done as an equity transaction or as a convertible note, which is basically a way to punt on the question of negotiating a valuation for your company until the next financing round.

In either of those cases, there isn't typically a provision for payment to the investor by the company. In debt financing, however, you'd be paying interest. So it's possible that these investors are proposing some sort of hybrid model, combining elements of debt and equity. This is uncommon, though, so if an investor has designs along these lines she would probably let you know.

Perhaps more likely, these investors might not be looking for a formal payment agreement, but more for a plan of how and when they can cash out. They'll want to know what happens after they've put in their money. What additional rounds of funding do you expect? What scenarios allow them to cash out? Who are the potential acquirers and how do their likely acquisition plans match up with points in your company's maturation? Good answers to these questions need to be plausible but aren't a promise -- you can't possibly know how it will actually turn out, but it helps investors understand your ambitions and timeline, and if done well can hint at a success story that would be mutually beneficial.

So, if I were in your position, I'd try to get some answers sketched out for this last scenario -- i.e. how you foresee your company making money for equity investors -- and after discussing that for a minute or two, ask if that's what they had in mind when they asked for an ROI schedule. If they really are looking for something other than a standard equity or convertible note deal, beware: sometimes unusual deals are done with good reason, but it takes sophistication to judge whether you're being screwed or not, and will probably make things harder with other investors in this and subsequent rounds.