The stark reality of angel investing is you had better hope someone else’s money follows yours… Angel investing is an act of faith, to fund a startup at its earliest stage in the hopes that you’ve found the unicorn – that rare company that will defy the odds and succeed fantastically. But angel investing is really an act of faith that more disciplined (read: institutional) money will see the same potential you do.

My recent columns have urged a disciplined approach to angel investing. But when it comes time to  invest you should be ensuring that enough money is raised so that the startup can advance its business model and present a more developed opportunity to venture investors. While West Coast and East Coast angel investments are structured differently, they yield the same result: they have either converted into the venture round that occurred or they’re worth little.

On the West Coast, this reality is acknowledged by an agreement called a SAFE – “simple agreement for future equity” created about 6 years ago by a California accelerator for startups called Y Combinator. While SAFEs have gotten a bit more complicated, the basic premise is to make the investment process easy, transparent and allow the entrepreneur and investor hone in on the one variable that matters: the valuation cap for the investment. A valuation cap ensures that if the venture round is priced higher, the SAFE investor gets the benefit of more shares from that financing, reflecting the risk taken.

On the East Coast, the angel investment is usually in the form of a convertible promissory note, which, frankly, creates a whole lot of confusion. Like a SAFE, these convertible notes generally “convert” into a venture round and they also have a valuation cap (and often a discount against the price of the venture round) to reflect the risk of their investment, Both SAFEs and convertibles notes have some date of reckoning – when they mature. With SAFEs, you generally end up a common stockholder. With convertible notes, angel’s sense that when the note comes due (assuming there has been no investment round to convert into) they somehow are getting paid back… It’s debt, right?

If the note hasn’t converted, that usually means the startup hasn’t performed and hasn’t attracted additional capital and is out of money. Since these convertible notes are debt, I guess there is some sense that the noteholder can take over the assets. But think about it. The team closest to the technology will probably leave, the technology itself is nascent and unlikely to be of interest to another company. The “note”, the idea that somehow the angel is somehow better off holding debt, is chimeric.

Angels must face the stark reality when they invest, the funds raised need to drive the company to point where additional capital is attracted and hopefully at a valuation in excess of their cap. There is no other way to think about it, the stark reality is that angel investing is the process of capitalizing a company to make it to the next stage of investment. If you don’t believe the funds in your angel round will get the company to that next level, don’t invest.

With more than 30 years’ experience in law and business, Newt Fowler, a partner in Womble Bond Dickinson’s business practice, advises many investors, entrepreneurs and technology companies, guiding them through all aspects of business planning, financing transactions, technology commercialization and M&A. Newt can be reached at newt.fowler@wbd-us.com.