I started a surveillance technology company in May 2010. Since the beginning, we have been working with a person that has been in the security industry for quite a while. He was providing some input, and contacts...but no real sweat equity. Originally he wanted to resell our equipment through his newly started security company (that offered more than just our stuff), but has since decided to just focus on our product. He is migrating over to just using our company name and such.
He also wants to invest. After mentioning to him that we were thinking of pursuing a bit of funding (50K CAD) to develop a new product, he jumped at the idea and said he would be interested.
I guess I could treat him as two separate entities: Sales guy, and Investor. But it seems a bit weird. For one thing, since he has a direct impact on our sales right now, he could if he was devious enough, slow our sales until the investing thing started moving forward, so that the company is temporarily devalued.
My question: Is it a conflict of interest to have someone in a independent sales role also become an angel investor? Or more broadly speaking, should angle investors be arms length from day to day operations of a business? The other issue is I have no idea what to give for 50K. I am hesitant to give any more than 10% as I have had two full time engineers (myself and my partner) working on this company for essentially nothing since May 2010 (incorporated October 2010). But thats maybe another question.
It is a common situation for people to wear multiple hats in small businesses. I wouldn't worry about treating him as two separate things. If you are really worried that he would do something like slow down sales so as to devalue your company, you need to not be working with him in either role. I suspect though that that was just a momentary lapse into paranoia. ;-)
I don't think being arms length from day to day operations is a requirement for an angel investor but being arms length from day to day management is. His familiarity with your business is why he is interested in providing you with funding. A salesperson can provide you with good usable intel about your buyers and you want that.
The other thing you need to do is talk to him about the elephant in the room. Let him know that you would love his money but you are not looking for a boss. If he truly wants to be an angel, he will get that.
It doesn't have to be an equity investment - there are many other structures starting at a simple installment loan and ranging to more complex variable returns. A high-interest loan is not a bad investment for someone with extra cash, but if you can get it from the bank you'll want the lower interest rate.
I believe some angel investors are using loans that are convertible to equity in the future based on the share price at that time, which is a nice way to push the decision down the road until you have a better idea of the value. (re-edit: Jason's answer on As an Angel Investor - How can I make money / exit builds on this)
To answer the question of whether it's a conflict - think about it from the other angle. If you got an angel investment from a stranger who also happened to bring you customers, that would be giving you extra value. You would then want to negotiate with them to see if they get any commission on top of the profit they see from their equity.
Obviously someone who's close to your business can try to cheat you but that's true of any employee, manager, or investor. In this case you have the big advantage of having worked with this person for some time already and knowing what they're like.
Not having been in this specific situation before, I would say it's not a generally bad idea as long as you're not giving away too much.