With much love for my angel investors, angel investing is absolutely a mug's game.
If the company doesn't get off the ground (vast majority of investments) you lose all your money.
If the company does get off the ground, you are the lowest on the pref stack, and you have no ability to follow on to protect your position.
You're not a contributing employee or meaningful future source of capital so your piece of the pie is just dead weight on the cap table. This means every single subsequent investor (and the founders, if they care more about money than their relationship with you) has an incentive to cram you down.
So net net the chances of success from passive angel investing are only slightly better than playing the lottery.
Best approach would be to make very few investments, where you're able to build a special relationship with the founder, and ideally get a board seat to defend your stake.
===
Edit - to be clear, I don't think startups should be giving board seats to angel investors. It does happen in exceptional cases where the angel is uniquely valuable to the company, and those are the cases where the angel can defend themselves. But they are rare, which is why it's mainly a bad game to play.
alexeichemenda · 14h ago
>Best approach would be to make very few investments
Top VCs—who see the best deals and run deep diligence—still only have a 1–5% hit rate. As an angel, you don’t have that level of access or time. Even if you get strong referrals, you’d need to be 10–15x better than elite VCs to pick winners in a small portfolio. Unless you’re investing in at least 10 companies, it’s statistically a losing game.
My experience: I invested in ~200 companies early stage (with some winners like HuggingFace, Checkr & more).
jll29 · 13h ago
"...and run deep diligence"
I've not seen that much but what I've seen is "Let's ask a few buddies and google a bit".
The takeaway that I agree with is the parent's and OP's point that you will need to invest in a lot of companies, perhaps 30-50, and you will nee to be in for the long term.
onlyrealcuzzo · 5h ago
A lot of angel investors are not investing particularly large sums, and a lot of what they're doing is buying someone that's going to use services other people they're connected to are selling.
When you're multiples are 10,000x revenue, a lot of people will shell out $10k to get you onto a few startup services...
That's the investment itself. Not getting paid back.
dmos62 · 13h ago
What's your biggest motivation for doing angel investing?
iwontberude · 13h ago
Developing a network of people who do favors for each other and learning about other people’s businesses and industry. Angel investing usually isn’t that capital intensive, so it’s sometimes worth pursuing. I don’t do it to get rich.
code_biologist · 10h ago
At my last startup, I think our board and observers liked hanging out more than they liked talking about the company. It wasn't perfect, but it's their money so I wasn't going to complain.
gorgoiler · 14h ago
Is it a thing for angels to exit in the early rounds?
Instead of being shoved down the cap table by a giant tranche of series A preferred stock, might it not be appropriate to give the angel a payday instead?
I guess some angels want to keep their fingers in the pie? And, more likely, it’s just not a reasonable expectation to see an exit like that way before anyone else does?
DrAwdeOccarim · 13h ago
Yea, I’ve seen cashing out the principal+next investment and letting the rest ride.
chii · 13h ago
early exits probably won't get the type of return that an angel investor would be interested in monetarily, since you need more than fu-money to motivate them.
pfannkuchen · 12h ago
Isn’t angel investing more about networking and feeling like some elder statesman than about returns? That’s my impression anyway, as a non-angel.
bilsbie · 16h ago
Is it not reasonable to ask for a seat in every investment?
hellcow · 16h ago
A general rule of thumb is that you have 3 board members at the seed (1 non-CEO founder, the CEO which is typically another founder, and the lead investor). So you have 1 seat available for investors, whereas you may take 5-20 checks. Not everyone is getting a seat.
At the A you usually expand to 5, adding the lead of the A round and an independent board member. Beyond that, it’s common for the earlier investors to get replaced on the board in future rounds and maintain observer rights.
algo_trader · 14h ago
What happens if your "lead" angels want to put money but not a board seat?
bcantrill · 14h ago
If you are taking truly no institutional capital, it's a party round -- and unless you have a repeat founder that knows exactly what they're doing (and often even then!), it's a huge red flag.
A board seat? Absolutely not, you’re a minor investor.
A pro rata opportunity? Maybe but why wrangle 50 angels when you can have 2 firms cover it?
edoceo · 14h ago
You don't do 50 angels. They're in one SPV and you only work with the deal-lead (while getting investment from N investors)
bix6 · 14h ago
Hopefully but not always
BlandDuck · 16h ago
Too many investors, too few seats
codezero · 16h ago
Very few of the startups I’ve worked for have given board seats before Series B.
bee_rider · 15h ago
> So net net the chances of success from passive angel investing are only slightly better than playing the lottery.
Is this right? An organization running a lottery—their whole job is to run a lottery, they’ve staked their reputation on the fact that they pay out to winners. The one with a reputation to defend is the one paying out.
The company angel investor is dealing with a company that, ultimately, wants to either get into position to sell some service, or wants to get bought. Their raison d'etre isn’t being a reliable payer-out of winners. I’d expect the lottery to be much more honest.
johndevor · 15h ago
> Is this right?
OP made an unbacked assertion and that can be ignored as such.
bee_rider · 13h ago
Eh, this is a site for chit-chatting, so I don’t expect perfect proofs generally. Assertions that are backed only by personal experience and hard-to-verify anecdotes are fine IMO.
paxys · 16h ago
At best it’s a stepping stone to a “real” VC job.
Take a couple years to learn how the industry works, make connections, maybe even get lucky with some bets. Then use all that to either start your own fund or get a job at a big Silicon Valley VC firm.
Mbwagava · 13h ago
Hell, investing in general is a "mug"'s game (never heard this phrase before) if you go by per-capita return. It's the exceptionsl performers that make an outsized contribution to revenue that floats the whole boat.
sanderjd · 11h ago
I read the point as being that angels can't really afford to invest broadly enough to hit those exceptional performers.
jay_kyburz · 9h ago
>Four others that raised money but with painful recapitalizations that effectively wiped out early shareholders
I think its the recapitalizations that make the investments unfair. To buy a stake in a company then have it diluted by the bigger fish once a lot of the risk has been mitigated is BS if you ask me.
tinyhouse · 14h ago
I'm not sure I'm following how anyone can target the angel investors specifically? Aren't all common share holders have the same fate? So if they screw the common share holders, early employees will get the same treatment as the angels? (dilution for example impacts all share holders). I understand that key employees can receive extra shares along the way, but most probably don't in their first 4 years.
RainyDayTmrw · 13h ago
The way I've heard it is that later investors collude (descriptive, academic term, not value judgment) with founders via liquidation preferences, dilution, etc., and effectively wipe out all common shareholders (particularly employees) and all earlier rounds, and then give the founders some additional terms to compensate them specifically. How exactly that works, what they're giving the founders, and how this isn't hugely illegal are all details that I don't understand. I put a top-level comment asking exactly that.
propter_hoc · 13h ago
That's exactly the approach. Seen many deals where the (remaining) founders get a big slice of new vesting options or reverse vesting shares as part of a recap or semi-distressed round.
Nothing illegal about it when the company needs the money, just one investor can write the terms they want, and the founders are on board with the plan.
RainyDayTmrw · 13h ago
I understand that, particularly in a down round, investors can push to get more. What I don't understand is what allows founders to get a side deal. It seems like that would go against fiduciary duty to common shareholders and earlier rounds.
propter_hoc · 12h ago
It's because the investors still need the founders to run the business, usually.
RainyDayTmrw · 12h ago
More bluntly, why wouldn't/can't the other common shareholders sue?
vkou · 12h ago
Because then they'd be left with their original stake, but in a worthless, bankrupt company.
kadoban · 3h ago
Sounds like leverage to me.
vkou · 1h ago
They are always free to give the worthless, bankrupt company they own more money, and thus avoid dilution.
newsclues · 10h ago
But it sounds like the ford v dodge brothers cases that most abuse as an excuse for corporate profit maximization.
A company should not work to enrich some shareholders at the expense of others
pea · 2h ago
You can do a pay to play where anyone who can’t follow on at a certain price gets wiped out
themanmaran · 14h ago
Yea the founders also have majority common stock. So there's not a normal scenario where the founders and other investors get paid out in an exit, but the angels don't.
The bigger fear is a non-exit scenario, where the company becomes profitable, possibly pays out large investors to maintain the relationship, and founders just take massive salaries. So no liquidation event that benefits angel investors.
ummonk · 2h ago
Yes, being an early employee is a sucker's game in much the same way as being an angel investor.
wslh · 15h ago
This, and I'd add that one underrated upside of angel investing (and being LP of funds) is access to real, unfiltered information about the startup and the market. That's often far more insightful than the "everyone is crushing it" narrative you see in the media. In the article, the author mentions that she found other ways to get that info.
peterlada · 11h ago
Way off. Angel investing is betting on people you know well enough.
light_triad · 1h ago
Interesting that some people here are advocating for fewer investments and board seats when angel investing. It's rather the opposite: you need more investments and less time spent on companies.
Angle investors are vital to the startup community as they take a lot of risk and are able to fund ideas that sound too crazy to get regular funding. In this case though given a hit rate of let's say 1% for argument's sake, 54 investments in 15 years is too low. You need hundred of investments to make the math work. Also doing it for fun and to learn is laudable but in the end hitting an Uber or an Airbnb is all that matters. It sounds like the job became full time consulting which is great if you're wealthy and want to give back to the community but can become unsustainable otherwise.
RainyDayTmrw · 13h ago
I've heard variations on this sentiment repeated a lot. The exact message varies, but it's usually some variation of: early investors always lose, small investors always lose, and/or non-preferred shareholders always lose. I've seen and lived a small number of personal anecdotes that seem to back this up, and I'd like to better understand what underlying pathology causes this.
I understand that early investors are taking the most risk, and clearly there's a lot of downside. But what prevents them from being able to realize or capture the upside?
I've heard a theory, a few different times now, that bigger, later investors effectively collude (descriptive term, not value judgment) with founders to squeeze out early founders and employees (common shareholders) via unfair terms, such as excessive dilution (accepting too low a valuation for larger investment), excessive liquidation preferences (2x or more), etc., and then topping the founders up via side deals. I've heard that, by virtue of squeezing out passive participants, they're able to offer more to the founders, and that incentivizes the founders to take their deal over other alternatives. Does anyone know more specifics about how this happens? In particular, how is this not a breach of fiduciary duty to passive participants?
It's definitely possible to write anti-dilution clauses, etc. But, I've heard that more or less no one writes them, and more importantly no one accepts them. If this is a pretty well-known game, why haven't countermeasures become popular?
For my personal anecdote, I was once an early engineer - the first hire after their Series A - at a small startup that never found product-market fit. The economy was bad, and they were running out of money, and they took - as I understood it - a dubious Series B led by a dubious investor. The founders were very vague about the terms of the round. In particular, the founders revealed that the investors took liquidation preference, that it was greater than 1x, but absolutely refused to say how much. That always left a bad taste in my mouth. When I left, I didn't exercise my options. In the end, the company floundered, and is a zombie to this day. In that regard, I suppose that the particulars of that round don't really matter - none of us were seeing anything regardless.
I'd really appreciate if anyone closer to the money part of this industry could weigh in.
ProblemFactory · 2h ago
> later investors effectively collude with founders
> a small startup that never found product-market fit. The economy was bad, and they were running out of money, and they took - as I understood it - a dubious Series B led by a dubious investor
The unfortunate reality is that if a startup cannot survive for long on its own, the economy is bad, and investment interest is low - then past invested effort from founders and employees and money from early investors is a sunk cost. They have together created something with almost no independent economic value.
The later investors can buy the assets created so far at near zero cost (the alternative is a bankruptcy auction). They can reasonably argue that the future value of the business is all from their investment, together with a deal to hire the founders and current employees to invest future effort into it.
RainyDayTmrw · 41m ago
I mean, yes, that's exactly the argument that the bigger, later investors make, and their lawyers are happy to back them up on that for money.
But consider this. If that were truly the case, why would the later investors work so hard to maneuver their way into this allegedly worthless startup? Why not hire an entirely separate team to build an entirely separate app, and they can own the whole thing with no fuss? If they value the founding team, why not tempt them away to a new venture, and shed all the baggage? Economics has an idea called "revealed preferences" - that words can be deceiving, but costly behaviors are honest - and this does look to be the revealed preferences of the investors.
In other words, just because the later investors can use the threat of insolvency to get their way doesn't mean what's already there doesn't have value.
danielmarkbruce · 6h ago
It's people who lose, which is most, complaining about structural issues when actually they just suck at investing. It's a competitive game, they lost.
RainyDayTmrw · 6h ago
I mean, multiple things can be true at once, no? They could have made bad choices or had bad luck. Simultaneously, the system could be rigged for and against certain categories of participants. From what I've heard, there's a lot of both of these going around; startups are highly volatile, but also a lot of the people in the space not only don't play fair, but actively deride playing fair.
danielmarkbruce · 2h ago
You are hearing the voices of failed investors. There are successful angel investors. There are guys in the NBA finals getting paid $50m a year. There are movie stars.
In extremely competitive pursuits with insanely good outcomes, you are going to find an enormous number of people trying to make it and fail.
tzury · 5h ago
Well, it says right there at the beginning:
"Next week, I'll follow up with the cold,
hard data on my portfolio performance"
>Angel investors also face the longest time horizon for liquidity of any investor. Private equity aims for 3-5 year returns, and VCs typically run 7-10 year fund cycles, but angels usually wait 10+ years for exits. This means angels aren’t just taking company-specific risk, but also the risk of facing more macroeconomic cycles.
>Think about all that's happened since 2009 when I started: multiple presidential administrations, a global pandemic, zero interest rates, and now high inflation and higher interest rates. My investments have had to withstand all of these shifts, and many didn't make it through.
Really interesting stuff (for me, as an outsider).
Can anyone comment if VCs are looking for shorter fund cycles or are the macro economic shifts what's capping it at 10 years?
I once read one reason why startups take so long to IPO is so private investments can benefit longer from the growth
bix6 · 15h ago
My LPs want liquidity now, always. 2021 was hot and it’s been relatively quiet since. Mega funds are keeping companies private longer. Capital is tied up which hurts emerging managers trying to raise. My LPs want returns in 6 years which only works if everything goes perfectly which almost never happens; that’s how long $100M+ rev takes if you triple yearly. IPO requires more rev than before, everything’s larger.
bsuvc · 15h ago
6 years?
As an LP, I would be excited for liquidity in 10 years at this point.
It seems like even for successful companies, there isn't a clear path to an exit for many of them. Add to that the increase in late-stage investors, and there isn't much of an incentive to exit.
bix6 · 14h ago
A bit hyperbolic but yeah. It also depends on the industry / stage. I’m always looking for creative ways to get liquidity out given the exit issues you mention.
bsuvc · 14h ago
I wasn't trying to be hyperbolic actually. I really would be happy if an exit would happen in 10 years.
Thankfully, I can be patient, but I wonder sometimes if some of these companies will ever exit.
bix6 · 13h ago
Sorry, I meant my statement was a bit hyperbolic at 6 years.
Waiting for a few as well, good luck!
LunaSea · 15h ago
Would smaller ventures not be an option? Say investing 500k$ and selling for 10M roughly 5 or 6 years later?
I would imagine that building these smaller companies looking for smaller exists would be easier and more predictable.
bcantrill · 14h ago
It would be helpful to run out the math on the $500K investment: what's the post-money on that investment when it was made? How much capital did this mythical sold-for-$10M in 5-or-6 years company raise? (Or did it survive for a half decade on a total investment of $500K?) What was the headcount and the revenue and the burn? (And to whom does it sell for $10M?) Assuming that it wasn't a wipeout, you'll quickly find that the math doesn't... math: if you have somehow conjured a successful outcome in your mind, what you likely have is not a venture-scale business.
bix6 · 14h ago
That’s not necessarily venture returns so LPs might not be interested. Selling secondaries is also a pain as you generally have to pay fees and sell at a discount.
crsv · 13h ago
It’s hard for me to respond to these kinds of posts with anything other than a dismissive sentiment along the lines of “grats on being rich and playing your rich people sport. I’m sorry you don’t like your rich people sport anymore. Hope your next rich people sport is fun for you.”
xpe · 5h ago
I get your point. Still, there are other ways to respond, even if they are difficult. One is to be curious and take what you can from it.
Another is to think about people poorer and less fortunate than yourself who might look at you dimly for what you take for granted.
I’m not saying that morality is relative, but points of view sure are.
baobun · 3h ago
> It’s hard for me to respond to these kinds of posts with anything other than a dismissive sentiment
Nobody's forcing you to respond, you know?
auggierose · 12h ago
You got it right, this post is directed at other rich(er) people.
tananaev · 16h ago
I think there's just too much money chasing too few good businesses. Early days of tech boom with lots of opportunities is over. Any promising startups nowadays get crazy valuation very quickly, so stop making financial sense to invest in.
xpe · 5h ago
How would you test this claim relative to alternative hypotheses such as:
1. Investors choosing poorly
2. Investors not managing relationships well after they invest.
Maybe we can open up the discussion to involve the other design decisions that go into how funders structure deals and involvement.
w10-1 · 1h ago
Two vaguely confirming data sources:
- Other investment assets have seen higher inflation rates in the US in the last decade
- Buffet et al are holding cash, ostensibly for lack of qualified opportunities
But it would be interesting to compare with China, Europe, LatAm...
georgeburdell · 10h ago
If it’s a bad time to invest, would it be a good time to be on the other side of the table?
Havoc · 14h ago
>The post-ZIRP era (2023-2024) created headwinds
Post ZIRP is arguable the more normal situation, in which case one really has to ask...was it ever real
bix6 · 16h ago
SAFEs have also caused so many issues. They’re often poorly priced and can lead to legal issues or frustrations.
bcantrill · 14h ago
Absolutely. The reality is that SAFEs are often used to price a company, even though the pricing conundrum is exactly what they are trying to solve! If you want the reveal on SAFEs, raise them uncapped (with a discount, of course!) and watch how many people tell you that they can't possibly do that. (Not everyone, though -- deeply appreciate those investors who are willing to invest on uncapped discounted SAFEs!)
bix6 · 13h ago
What’s your rationale for uncapped SAFEs? I don’t think they are a good deal for investors.
pge · 14h ago
I feel like this is not talked about enough. SAFEs are not the trouble-free investment vehicle that many people seem to think they are.
pgustafs · 15h ago
it's called "angel" investing because it's only one step removed from charity
rbanffy · 15h ago
Can I be a demon investor? That’d be a dream job.
n20benn · 15h ago
I believe that's the sentiment the "Shark Tank" or "Dragon's Den" series are trying to hint at.
linkjuice4all · 10h ago
It’s just called investor at that point.
rbanffy · 3h ago
Investors are in for the money. I’d be in for the sadistc side.
But not really. I wish I could be that evil. I’d be a lot richer if I were willing to play that kind of game.
ryanmerket · 13h ago
my charity donations are capped with the IRS. But my cap gains (and losses) live forever.
astrange · 11h ago
Almost everyone's charity donations are worth zero with the IRS since everyone takes the standard deduction now.
helixfelix · 9h ago
Your comment made me realize what a bubble of privilege I live in.
I raised my eyebrow at "everyone takes" standard deduction. How is that possible with home prices and interest rates? Even a modest 300-400k house at 5-6% interest, property taxes, local sales tax deductions and minimum charity would exceed the standard deduction. Where I live good luck finding anything more than a condo for less than a million.
Turns out 90% take standard deduction. This is another way to track the extreme "wealth" gap emerging. Only the wealthy itemize.
alabastervlog · 4h ago
We have a house more expensive than that, an interest rate around the top of that range, live in a state with somewhat high property taxes, and had at least $4k in health care spending on top of insurance premiums (no big problems, that's just what a handful of minor kid-related issues in a year costs in the US) and still wouldn't have done better itemizing. We took the standard for 2024.
We're ~92nd percentile for household income.
ip26 · 4h ago
It’s more of a reality when home prices are over a million, or in a state with high property taxes. Be married, live in a state with low property taxes, buy a house for 700k… and you’re taking the standard.
tl;dr: returned $0.31 on every dollar invested, albeit with a bunch of ongoing investments that may still pay off (but are unlikely to get her even on the investments let alone a profit)
ryanmerket · 14h ago
the blog post could have been a lot shorter: "I quit angel investing because I'm not very good at it."
itbeho · 12h ago
Per her linkedin: She's currently an adjunct professor at Columbia teaching a class on "Investing in Digital Health Startups".
Do US angels get tax breaks on these investments? The floor in the UK is basically £0.70 on the pound.
yieldcrv · 15h ago
yes, if you buy shares in the primary market (directly from the issuing company) there are tax free capital gains, up to a point. which can be gamed to be infinite.
its called QSBS
barbazoo · 15h ago
Might as well use the money to support your local shelter, less overhead and it actually does something good for a change.
procaryote · 10h ago
I worry about the things an investor-run shelter would try to make their investment profitable
barry-cotter · 3h ago
Giving money to your local homeless shelter encourages homeless people to move near you (see San Francisco). Making a lot of risky investments in businesses encourages people to start new businesses. One of these has positive second order effects on economic growth.
Those kinds of stats typically consider people like couchsurfers to be "homeless", which is not what normal people typically consider "homeless".
skavi · 2h ago
are there stats which suggest "couchsurfer" and non "couchsurfer" homeless people have significantly different origins?
investa · 1h ago
Neither helps homelessness. Building more affordable homes is the solution. Which also has 2nd order effects.
fsckboy · 13h ago
i understand your true and noble motivation, but the law of incentives is an iron law, and it tells us your subsidy will incentivize the burgeoning industry that demands more shelters
barbazoo · 13h ago
They often enable people their way to recovery. Individuals are better off because of them. Do you have a source for your claim that more shelters cause more use of shelters which is what I think you’re saying right?
kilimounjaro · 11h ago
From chatgpt: “ In summary, Halle Tecco’s personal portfolio comprises about 34 direct investments, of which 24 have at least one female founder (as detailed above). This means roughly 70% of these companies were co-founded or founded by women. Notable female-founded companies in her portfolio include Everly Health (Julia Cheek), Cityblock Health (Dr. Toyin Ajayi), Kindbody (Gina Bartasi), Tia (Carolyn Witte/Felicity Yost), Hued (Kimberly Wilson), and many others listed in the first section. Halle Tecco’s investment focus has clearly encompassed a large number of startups with women on the founding team, aligning with her advocacy for female entrepreneurs in health tech ”
Call it charity or call it buying gal-pals with hubby’s money but primarily investing based on identity seems like a bad idea
bombcar · 11h ago
If X contributions and value are undervalued by the market, investing where X is contributing would be a winning strategy.
If
swyx · 10h ago
made me wonder who hubby was, so saving others the wikipedia search
> Tecco is married to Jeff Hammerbacher, cofounder of Cloudera
If she’s rich and married a successful tech founder, I don’t understand why she didn’t get a lawyer to draft these investment papers to keep herself from getting fleeced. Like the amount she was dropping could probably have been recouped from a buyout without much fuss if the contracts were a bit more assertive.
necubi · 5h ago
As an angel, you do not get to set weird terms for your 10k check. The startup is raising on standard paper (these days almost always a SAFE) and you take them.
But no terms are going to save you from the reality that a failing startup that needs to raise more money will have to accept dilutive terms. You might be able to restrict it, but the alternative is that they can’t raise at all and shut down.
danielmarkbruce · 6h ago
It's not a legal issue. If you invest your money in failed businesses, you lose. There is no legal machinations that will help.
swyx · 5h ago
too blithe. range of outcomes between failed and IPO.
TFA identified a few exits that should have returned some money that did not. ensuring protection of minority shareholder rights so that this doesn't happen is an important "plug leaks in your game" hygiene
danielmarkbruce · 3h ago
Too dumb.
Most exits in that range are where the exit is less than the capital raised, or a little more but where the last round raised was questionable and was done on terms that the minority shareholders may complain about but where they didn't have any other option - they were hosed no matter what.
I've seen hundreds of them. And it has little to do with size of position, it's where you sit in the preference stack. Anyone who thinks that early round investors should get a pay out on an exit no matter what just doesn't understand pretty basic finance.
"exit" != success, for anyone involved, usually.
particle_theory · 3h ago
Angel investors should do a __post money fixed percent SAFE__ . Why invest if you dont spend the effort doing the payoff math? Just ask an LLM..
> Over the years, I’ve purchased stock in about a dozen companies on the Robinhood app. Some have tanked ... but unlike startups, none have gone to zero.
Close to 500 US listed public companies filed for bankruptcy during this period.
rorylaitila · 9h ago
I live in Delaware, a chronically bad market for angel or seed funding. Of the funds that existed, I always thought they took the wrong track of seeking real returns and requiring way too much business validation. It should have just stayed as a way to help foster the local startup community with some potential upside.
asdsadasdasd123 · 13h ago
> Four others that raised money but with painful recapitalizations that effectively wiped out early shareholders
I don't get how this kind of stuff happens.
klntsky · 9h ago
A little something is better than nothing, so the board can dilute if a shutdown is on the horizon.
gitroom · 10h ago
Oof, the amount of ways angels get squeezed out is kinda nuts, makes me way less excited about the whole early-stage game honestly - you think there's actually any way for small investors not to get hosed long-term or is that just the rules now?
mattlondon · 14h ago
If at one point your shares are worth 1% of the company (the 1M of 100M startup example), how does that get diluted to nothing on acquisition? I thought the whole point of the early stage investments were you were the first people to get the payout, not basically the last/never?
RainyDayTmrw · 12h ago
For "regular" dilution, the way it works is that there's a pre-money and post-money valuation. If a company is worth 1M pre-money, and an investor puts in 1M, then the company is worth 2M post-money. Someone who owned 1% before (effectively 10k of the pre-money) now owns 0.5% (effectively 10k of the post-money). Ostensibly, their stake should be worth exactly the same before and after the deal, a smaller slice of a bigger pie. In practice, there's various incentives to inflate valuations, such that the early investor's slice is getting smaller faster than the pie is getting bigger.
Furthermore, investors tend to demand extra terms on top. The big one here is called liquidation preference, which is a clause that says, approximately, if/when this company is sold, this investor gets the first X amount of it, usually corresponding to some multiplier of their investment amount. Later rounds will ask to win out in preference, effectively creating a stack of liquidation preferences. In practice, liquidation preferences can often add up to so much that a moderately-successful sale goes entirely to preferred shareholders, and common shareholders see nothing. Perhaps the dealmakers put in a bit of a sweetener for the founders and/or current executives to grease the deal. Your average employee and angel or seed investors certainly see nothing in this deal.
__turbobrew__ · 6h ago
On top of that, as long as the preferred investors get their slice they don’t care if common stock gets fucked over. There can be side deals where the buyer will “buy” the company for a lower price but gives the founders a huge salary and/or shares in the buying company.
For example, lets say a company is valued at 100mil with 50mil in preferred stock and 50mil in common stock where the preferred stock is owned by institutional investors and everyone else (including founders and angel investors) has common stock. Lets say there are two founders that own 10% each, an angel which owns 10%, and an employee options pool with the remaining 20%.
Now lets say there are two scenarios:
1. The company is sold for 90mil, 50m goes to preferred stock, and the remaining 40m goes to the common pool — 8m to each founder and angel and 16m to the options pool.
2. The company is sold for 50m, but the founders each get a salary of 5m for 3 years. The preferred stock gets the entire 50m. The angel and employee pools get 0, and the founders get 15m each.
In scenario 2 the preferred stock gets their share, the founders come out ahead by 7m each, AND the buyer has to pay 10m less than option 1. But the angel and employees get shafted.
RainyDayTmrw · 6h ago
The question then becomes why scenario 2 wouldn't be a major breach of fiduciary duty, and why common stockholders don't sue over it and/or regulators don't pursue it.
__turbobrew__ · 5h ago
What if the other common stock holders aren’t at the bargaining table?
RainyDayTmrw · 5h ago
There are a lot of ambulance chaser lawyers out there. I wonder why they don't see profit to be made here.
jay_kyburz · 9h ago
The problem is with the first step. If the angels owns 1%, and the founders own the other 99%. When taking more money, it should be the founders selling a portion of the 99%, not diluting the angles percentage.
The stake should remain the same, but double in value. That's the risk of early investment being paid out.
I'm really surprised it doesn't work that way.
RainyDayTmrw · 8h ago
The actual transaction is framed in terms of generating more shares in the company, such that existing shares represent an ever smaller piece of the total pool. What you're suggesting would be the founders selling a fraction of their shares to the new investors, while keeping total shares the same. Institutional investors are highly opposed to that, for a variety of reasons, including because they want founders to remain bought in to the company. (Some institutional investors will allow founders to "take some money off the table" to a small extent, but that's the exception and not the norm, and it's viewed as a favor to the founders. More cynically, institutional investors don't want founders to have financial independence before the company fully succeeds.)
RainyDayTmrw · 6h ago
The edit window has passed, so I'll add a new reply.
The other thing to keep in mind is that institutional investors will generally insist that founders earn out their stake via vesting over, say, 4 years. Then, the founders' stake, despite being earmarked for them, aren't officially theirs yet.
aurareturn · 12h ago
Because there are preferred shares common shares. Large VCs or loans will demand preferred shares. They get cashed out first in any exit. What's left could be nothing for common share holders.
This has happened plenty of times where a startup in a dire situation had to sell itself or raise a down round with poor terms to survive and the earlier investors got wiped out.
ww520 · 13h ago
Sold at a fire sale.
mattlondon · 13h ago
Precisely - it was sold so where did your 1% go at that sale?
ww520 · 10h ago
She got 1% of the pre-firesale valuation. Fire sale happened. Preferred liquidation of the later round investors probably took most of the sale's proceed, and she got nothing, along with all the founders and employees. It had happened to me a number of times, and I have been disillusioned a long time ago.
lbotos · 14h ago
Those with angel experience:
Do angels not get terms to "cash out" in secondaries/later rounds?
I was under the impression that some angels effectively acted as bridge financing to get to later rounds (in this case A/B/C) and to then exit if they wanted to?
kirubakaran · 13h ago
While that can always be arranged if all the parties agree, it would be a bad idea for the founders to give the angels the option to cash out like that, as the fact that they're choosing to cash out will tank all further investments. VCs will wonder "What do they know that I don't?"
Always consider signaling risk.
This can be avoided by always cashing out, I guess. But it's bad for angels to always cash out, as letting it ride on the unicorns is the only way to make meaningful returns, if any.
Always consider power law.
Mbwagava · 13h ago
Nb i actually really resent substack for sending me to the app. No; I don't want to pollute my history with this post, I just want to read it.
astrange · 11h ago
The app makes the experience worse because you can only have one article open at a time, instead of using browser tabs.
skeeter2020 · 14h ago
>> One company needs you to help close a key hire
>> Another is raising a bridge round and wants your input on the deck
>> A third is struggling with a co-founder conflict and needs advice
>> An investor calls asking you to vouch for a portfolio company they’re considering backing
This is the investor's perspective, but note all of these things consume a HUGE amount of time & energy from the founder(s) as well, and do nothing towards advancing your product or company. Good reminder how distracting outside funding can be - and this is AFTER you've gotten at least an angel round!
swyx · 10h ago
> Four others that raised money but with painful recapitalizations that effectively wiped out early shareholders. That last bullet was the nail in the coffin for me. For new investors to come in and wipe out early investors just because the market was in their favor was painful. It felt like opportunistic resets that enriched later investors at the expense of early supporters (not to mention early employees).
what? how does this happen exactly? i'm not aware of the normal mechanisms. are there not minority shareholder protections?
bayarearefugee · 13h ago
> Just since 2023, I have had:
> One company that raised over $100M, with my shares at one point valued at over $1M on paper, acquired in a fire sale that returned zero to early investors
> Two others that were also “acquired” with some fanfare in the media, but returned nothing to early investors
> Four companies shut down after being unable to get to profitability or fundraise
> Four others that raised money but with painful recapitalizations that effectively wiped out early shareholders
TL;DR - Angel investing became too much like being an early employee at a startup always was, except it was actual money being lost instead of sweat equity.
mnoronha · 12h ago
right -- much of the reasoning is also an argument against being an early employee. the main difference is the employee probably has more leverage against being diluted in later rounds.
bombcar · 11h ago
“Early employee” used to mean 90% of boring tech job salary + some gambling options.
Now it’s often 40% or lower of a tech salary and some gambling options
dhruvrrp · 2h ago
Isn't it exactly the opposite? It used to be low salary + gambling, but now that most people know how easy it is to screw early employees, folks ask for high(er) salary + gambling
rvz · 15h ago
Angel investor in the ZIRP era, quitting after a 10+ year bull market and never experiencing a market correction or downturn since 2008.
Maybe this one was just unlucky, lost money on the way and moved on.
turnsout · 15h ago
In a tale as old as time, the mega-rich get richer. It used to be that early stage VCs and angels could see tremendous upside for taking an early risk. It’s utterly unsurprising that giant VCs have found a way to cram them down once the startup is successful and realize all the upside.
Between this and giant PE coming downmarket, we should all just bootstrap and say “f off” to outside capital. With AI coding models, you don’t need that money to build anyway.
fsckboy · 9h ago
>In a tale as old as time, the mega-rich get richer
no, they don't. what is mega-rich keeps price inflating, but who is mega-rich are always new names.
if you are young, afauk Brin and Page have always been mega-rich, but just a little older and you remember when nobody knew who they were, nor had anybody heard of Zuck, or Musk, etc. and Jobs was a washed up has-been
kilroy123 · 15h ago
I agree. Bootstrapping is best if possible.
aabaker99 · 14h ago
> Four others that raised money but with painful recapitalizations that effectively wiped out early shareholders
Does someone have a recommendation on reading that goes deeper on this point? What enables later investors to do this? What can early investors do to protect their investment?
Centigonal · 14h ago
There are a few different ways this can happen. It has to do with seniority of liquidation preferences -- basically, if you recap or you exit for less than your highest valuation, who gets paid first? This blog post is a pretty great summary of what can happen: https://heidiroizen.tumblr.com/post/118473647305/how-to-buil...
kcatskcolbdi · 16h ago
"I stopped angel investing because I was losing too much money"
danielmarkbruce · 15h ago
100% this. Every type of investing should be stopped and is a waste of time and money if you are losing.
Talk to the few people who angel invested in google and facebook. They'll tell a different story. From their private jet.
htrp · 5h ago
how many ppl were angels in fb/googl/tsla?
danielmarkbruce · 2h ago
Hardly any.
Finding and investing in brand new businesses trying to quickly grow to hundreds of millions in revenue on reasonable terms in a highly competitive world is insanely difficult...Why would it not be? It cannot be any other way.
yieldcrv · 15h ago
Some things just need to be said
MaxGripe · 14h ago
In my opinion, all companies that have some kind of "investor" always end up the same way: eventually, a paid sociopath is installed as CEO whose only goal is profit maximization. If the CEO were someone who valued noble ideals or principles above profit, the investors would quickly replace them with a more "optimal" person.
abhisek · 2h ago
> whose only goal is profit maximization
It’s really a trade-off. If you raise too much money, you have to at least on paper show growth. All the levers then are tuned for growth.
On the other hand, you risk loosing out in the market if you raise just enough to build a viable product and get initial customers with the goal of growing organically.
Market rewards the winners. Look at Wiz, they captured the cloud security market by raising huge capital and moving fast.
Open source route is probably the way to go if you want to build a product based on your foundational ideas. Helps drive adoption organically and hopefully discover a monetisation opportunity.
Joel_Mckay · 4h ago
Your perspective is a common myth, as in business ones reputation and integrity ultimately determine the formalized credibility of your firm. This is true with consumers, supply chains, customs bond subprograms, and your partners.
i.e. people can only lie, cheat, and steal from people for a finite amount of time. It ultimately leads to competitive disadvantage, and repercussions.
In general many VC/Angle "investors" were just predatory loan scams, that could ultimately destroy the founders firm. Warning signs often include proposals to table personal assets, share dilution scams, equity siphon holes, and stock market IPO legal cons.
Using debt to grow is generally a bad long-term strategy, and positive cash flow is always king at any scale. If the firm can't make sales, than growth is just a fools errand.
In my opinion, the Zuckerberg story ruined a generation of business people. =3
dragonwriter · 4h ago
> i.e. people can only lie, cheat, and steal from people for a finite amount of time. It ultimately leads to competitive disadvantage, and repercussions.
That’s why you use you initial limited window to establish conditions where you don't need to compete, remembering competitive disadvantage a non-concern.
Joel_Mckay · 3h ago
I am unsure that a debt-laden firm with half-baked IP and zero revenue is much of a prize for bandits. lol
I have seen it happen, but usually irrational "winners" also evidentially become losers in a year or two. I think it is related to folks that compulsively gamble on other peoples ignorance, and eventually end up losing in court.
It is theoretically not impossible to "win" as a bandit, but the collateral financial damage to the people around you would be significant. Thus, the mean time before collapse would be proportional to the specified credit.
I honestly don't understand how private equity makes money at all. The playbook is:
1. Borrow a ton of money and buy a company on an LBO
2. Load up the company with debt, often complicated, exploding debt, to repay the original loan. Possibly sell off assets like real estate to pay off the original loan; and
3. Here's the kicker: sell off the company for a profit.
But we've seen time and time again that PE is a death sentence. Toys R Us, Red Lobster, numerous others. The company seemingly always explodes under the debt after the original snake oil salesman have cashed out. But my point is: who keeps falling for this and buying a PE hollowed out husk?
dehrmann · 13h ago
You've seen publicized examples (Toys R Us) where it played out like that, but that narrative doesn't generally pass the smell test–no counterparty would keep making bad loans. There are cases where companies are mismanaged, their value is as a real estate holding company, etc. and PE improves operations and creates a more investable business.
The other thing is that like VC, PE has become saturated, so the good opportunities just aren't there anymore.
kasey_junk · 13h ago
You are describing only 1 kind of private equity and only 1 subclass of that.
But there are lots of well publicized lbo success stories as well. Hilton, Safeway, Dell, Nabisco. The list goes on.
bogtog · 13h ago
I've also wondered how banks get convinced to offer companies the debt in these LBOs. The only explanation I see is that failures (Toys R Us, etc.) become well-known while successful LBOs and sales of companies with long-term profitability are quiet
graycat · 13h ago
Try to make some sense out of the OP. Start with some examples:
Google: As I recall, two guys in a garage, literally, until they had a good start on a good business, offered to sell out for $1 million.
Amazon: Bezos and a few programmers.
FedEx: I was there early on and saw a lot of stuff about the BOD (board of directors),
Founder-CEO, executives, General Dynamics, visitors from big NYC banks, funding of the airplanes, deals with Memphis to get space on/near the airport, the worker bees, etc. Was close to the action, office next to the Founder--CEO F. Smith, reported to a Senior VP with office across the hall but really reported just to Smith, was close to the BOD ("you just keep doing what you are doing until someone tells you to stop"), twice in work for the BOD enabled crucial investment and literally saved the company, etc.
Plenty of Fish: One guy, three old Dell servers, Microsoft's .NET with ASP.NET and ADO.NET, on-line romantic introduction site, sold out for $575 million.
Compared with Plenty of Fish, how Google started, and the arithmetic in the post, a summary: For the invested money: (a) Too many big, powerful chiefs, and not enough working indians. (b) Big hats, too few cattle. Too much overhead for the work done, e.g., per line of code written and running.
So, one approach: Start cheap, dirt cheap. Sole, solo founder. Only an LLC and with lawyers and accountants like, say, a grass mowing business -- LITERALLY. Founder lives cheap, say, in an area with low cost of living, in a used manufactured house, that is also the office, old used car. Take advantage of the still exploding Internet and cheap, powerful tower case computers (assembled from parts) for development and servers, $60/month 1 Gbps Internet connection, etc. Find a market need can meet with this dirt cheap approach and can get to profitibility with rapidly growing revenue.
So, leave out the time, cost, botheration of: Investors, lawyers, accountants, rented high quality offices, investor meetings, Board meetings, a management tree, manager meetings, reports to investors and the BOD, 10+ employees with all the expenses, legalities, lots of plane travel, employee stock plans, vesting, etc.
For a while, tried to raise funding; time wasted. Lesson: In simple terms, most VCs won't look at a business idea or technology before there is rapidly growing revenue. Then nearly all the VC money is used for the lawyers, other overhead, etc.
Comparison: (A) Dirt cheap: Invest $50-K a year. (B) Angel, VC, private equity approach: $10+ million a year. Big difference.
Problem: Investors need the lawyers, accountants, and other overhead so go for approach (B) where %10- of the money goes for the real work of getting the business going.
Back to work!
Archelaos · 12h ago
The author seems to be unfamiliar with angelology. The image she uses for illustrating her article does not show an angel, but a statue of Nike, the Greek goddess of victory. Cf.: https://en.wikipedia.org/wiki/Nike_(mythology) -- Is there an involuntary deeper meaning in this?
If the company doesn't get off the ground (vast majority of investments) you lose all your money.
If the company does get off the ground, you are the lowest on the pref stack, and you have no ability to follow on to protect your position. You're not a contributing employee or meaningful future source of capital so your piece of the pie is just dead weight on the cap table. This means every single subsequent investor (and the founders, if they care more about money than their relationship with you) has an incentive to cram you down.
So net net the chances of success from passive angel investing are only slightly better than playing the lottery.
Best approach would be to make very few investments, where you're able to build a special relationship with the founder, and ideally get a board seat to defend your stake.
===
Edit - to be clear, I don't think startups should be giving board seats to angel investors. It does happen in exceptional cases where the angel is uniquely valuable to the company, and those are the cases where the angel can defend themselves. But they are rare, which is why it's mainly a bad game to play.
Top VCs—who see the best deals and run deep diligence—still only have a 1–5% hit rate. As an angel, you don’t have that level of access or time. Even if you get strong referrals, you’d need to be 10–15x better than elite VCs to pick winners in a small portfolio. Unless you’re investing in at least 10 companies, it’s statistically a losing game.
My experience: I invested in ~200 companies early stage (with some winners like HuggingFace, Checkr & more).
I've not seen that much but what I've seen is "Let's ask a few buddies and google a bit".
The takeaway that I agree with is the parent's and OP's point that you will need to invest in a lot of companies, perhaps 30-50, and you will nee to be in for the long term.
When you're multiples are 10,000x revenue, a lot of people will shell out $10k to get you onto a few startup services...
That's the investment itself. Not getting paid back.
Instead of being shoved down the cap table by a giant tranche of series A preferred stock, might it not be appropriate to give the angel a payday instead?
I guess some angels want to keep their fingers in the pie? And, more likely, it’s just not a reasonable expectation to see an exit like that way before anyone else does?
At the A you usually expand to 5, adding the lead of the A round and an independent board member. Beyond that, it’s common for the earlier investors to get replaced on the board in future rounds and maintain observer rights.
A pro rata opportunity? Maybe but why wrangle 50 angels when you can have 2 firms cover it?
Is this right? An organization running a lottery—their whole job is to run a lottery, they’ve staked their reputation on the fact that they pay out to winners. The one with a reputation to defend is the one paying out.
The company angel investor is dealing with a company that, ultimately, wants to either get into position to sell some service, or wants to get bought. Their raison d'etre isn’t being a reliable payer-out of winners. I’d expect the lottery to be much more honest.
OP made an unbacked assertion and that can be ignored as such.
Take a couple years to learn how the industry works, make connections, maybe even get lucky with some bets. Then use all that to either start your own fund or get a job at a big Silicon Valley VC firm.
I think its the recapitalizations that make the investments unfair. To buy a stake in a company then have it diluted by the bigger fish once a lot of the risk has been mitigated is BS if you ask me.
Nothing illegal about it when the company needs the money, just one investor can write the terms they want, and the founders are on board with the plan.
A company should not work to enrich some shareholders at the expense of others
The bigger fear is a non-exit scenario, where the company becomes profitable, possibly pays out large investors to maintain the relationship, and founders just take massive salaries. So no liquidation event that benefits angel investors.
Angle investors are vital to the startup community as they take a lot of risk and are able to fund ideas that sound too crazy to get regular funding. In this case though given a hit rate of let's say 1% for argument's sake, 54 investments in 15 years is too low. You need hundred of investments to make the math work. Also doing it for fun and to learn is laudable but in the end hitting an Uber or an Airbnb is all that matters. It sounds like the job became full time consulting which is great if you're wealthy and want to give back to the community but can become unsustainable otherwise.
I understand that early investors are taking the most risk, and clearly there's a lot of downside. But what prevents them from being able to realize or capture the upside?
I've heard a theory, a few different times now, that bigger, later investors effectively collude (descriptive term, not value judgment) with founders to squeeze out early founders and employees (common shareholders) via unfair terms, such as excessive dilution (accepting too low a valuation for larger investment), excessive liquidation preferences (2x or more), etc., and then topping the founders up via side deals. I've heard that, by virtue of squeezing out passive participants, they're able to offer more to the founders, and that incentivizes the founders to take their deal over other alternatives. Does anyone know more specifics about how this happens? In particular, how is this not a breach of fiduciary duty to passive participants?
It's definitely possible to write anti-dilution clauses, etc. But, I've heard that more or less no one writes them, and more importantly no one accepts them. If this is a pretty well-known game, why haven't countermeasures become popular?
For my personal anecdote, I was once an early engineer - the first hire after their Series A - at a small startup that never found product-market fit. The economy was bad, and they were running out of money, and they took - as I understood it - a dubious Series B led by a dubious investor. The founders were very vague about the terms of the round. In particular, the founders revealed that the investors took liquidation preference, that it was greater than 1x, but absolutely refused to say how much. That always left a bad taste in my mouth. When I left, I didn't exercise my options. In the end, the company floundered, and is a zombie to this day. In that regard, I suppose that the particulars of that round don't really matter - none of us were seeing anything regardless.
I'd really appreciate if anyone closer to the money part of this industry could weigh in.
> a small startup that never found product-market fit. The economy was bad, and they were running out of money, and they took - as I understood it - a dubious Series B led by a dubious investor
The unfortunate reality is that if a startup cannot survive for long on its own, the economy is bad, and investment interest is low - then past invested effort from founders and employees and money from early investors is a sunk cost. They have together created something with almost no independent economic value.
The later investors can buy the assets created so far at near zero cost (the alternative is a bankruptcy auction). They can reasonably argue that the future value of the business is all from their investment, together with a deal to hire the founders and current employees to invest future effort into it.
But consider this. If that were truly the case, why would the later investors work so hard to maneuver their way into this allegedly worthless startup? Why not hire an entirely separate team to build an entirely separate app, and they can own the whole thing with no fuss? If they value the founding team, why not tempt them away to a new venture, and shed all the baggage? Economics has an idea called "revealed preferences" - that words can be deceiving, but costly behaviors are honest - and this does look to be the revealed preferences of the investors.
In other words, just because the later investors can use the threat of insolvency to get their way doesn't mean what's already there doesn't have value.
In extremely competitive pursuits with insanely good outcomes, you are going to find an enormous number of people trying to make it and fail.
https://substack.com/home/post/p-162623790
>Think about all that's happened since 2009 when I started: multiple presidential administrations, a global pandemic, zero interest rates, and now high inflation and higher interest rates. My investments have had to withstand all of these shifts, and many didn't make it through.
Really interesting stuff (for me, as an outsider).
Can anyone comment if VCs are looking for shorter fund cycles or are the macro economic shifts what's capping it at 10 years?
I once read one reason why startups take so long to IPO is so private investments can benefit longer from the growth
As an LP, I would be excited for liquidity in 10 years at this point.
It seems like even for successful companies, there isn't a clear path to an exit for many of them. Add to that the increase in late-stage investors, and there isn't much of an incentive to exit.
Thankfully, I can be patient, but I wonder sometimes if some of these companies will ever exit.
Waiting for a few as well, good luck!
I would imagine that building these smaller companies looking for smaller exists would be easier and more predictable.
Another is to think about people poorer and less fortunate than yourself who might look at you dimly for what you take for granted.
I’m not saying that morality is relative, but points of view sure are.
Nobody's forcing you to respond, you know?
1. Investors choosing poorly
2. Investors not managing relationships well after they invest.
Maybe we can open up the discussion to involve the other design decisions that go into how funders structure deals and involvement.
- Other investment assets have seen higher inflation rates in the US in the last decade
- Buffet et al are holding cash, ostensibly for lack of qualified opportunities
But it would be interesting to compare with China, Europe, LatAm...
Post ZIRP is arguable the more normal situation, in which case one really has to ask...was it ever real
But not really. I wish I could be that evil. I’d be a lot richer if I were willing to play that kind of game.
I raised my eyebrow at "everyone takes" standard deduction. How is that possible with home prices and interest rates? Even a modest 300-400k house at 5-6% interest, property taxes, local sales tax deductions and minimum charity would exceed the standard deduction. Where I live good luck finding anything more than a condo for less than a million.
Turns out 90% take standard deduction. This is another way to track the extreme "wealth" gap emerging. Only the wealthy itemize.
We're ~92nd percentile for household income.
tl;dr: returned $0.31 on every dollar invested, albeit with a bunch of ongoing investments that may still pay off (but are unlikely to get her even on the investments let alone a profit)
https://www.linkedin.com/in/halletecco/
its called QSBS
There is lots of homelessness because housing is expensive. https://www.noahpinion.blog/p/everything-you-think-you-know-...
Call it charity or call it buying gal-pals with hubby’s money but primarily investing based on identity seems like a bad idea
If
> Tecco is married to Jeff Hammerbacher, cofounder of Cloudera
https://en.wikipedia.org/wiki/Halle_Tecco
But no terms are going to save you from the reality that a failing startup that needs to raise more money will have to accept dilutive terms. You might be able to restrict it, but the alternative is that they can’t raise at all and shut down.
TFA identified a few exits that should have returned some money that did not. ensuring protection of minority shareholder rights so that this doesn't happen is an important "plug leaks in your game" hygiene
Most exits in that range are where the exit is less than the capital raised, or a little more but where the last round raised was questionable and was done on terms that the minority shareholders may complain about but where they didn't have any other option - they were hosed no matter what.
I've seen hundreds of them. And it has little to do with size of position, it's where you sit in the preference stack. Anyone who thinks that early round investors should get a pay out on an exit no matter what just doesn't understand pretty basic finance.
"exit" != success, for anyone involved, usually.
> Over the years, I’ve purchased stock in about a dozen companies on the Robinhood app. Some have tanked ... but unlike startups, none have gone to zero.
Close to 500 US listed public companies filed for bankruptcy during this period.
I don't get how this kind of stuff happens.
Furthermore, investors tend to demand extra terms on top. The big one here is called liquidation preference, which is a clause that says, approximately, if/when this company is sold, this investor gets the first X amount of it, usually corresponding to some multiplier of their investment amount. Later rounds will ask to win out in preference, effectively creating a stack of liquidation preferences. In practice, liquidation preferences can often add up to so much that a moderately-successful sale goes entirely to preferred shareholders, and common shareholders see nothing. Perhaps the dealmakers put in a bit of a sweetener for the founders and/or current executives to grease the deal. Your average employee and angel or seed investors certainly see nothing in this deal.
For example, lets say a company is valued at 100mil with 50mil in preferred stock and 50mil in common stock where the preferred stock is owned by institutional investors and everyone else (including founders and angel investors) has common stock. Lets say there are two founders that own 10% each, an angel which owns 10%, and an employee options pool with the remaining 20%.
Now lets say there are two scenarios:
1. The company is sold for 90mil, 50m goes to preferred stock, and the remaining 40m goes to the common pool — 8m to each founder and angel and 16m to the options pool.
2. The company is sold for 50m, but the founders each get a salary of 5m for 3 years. The preferred stock gets the entire 50m. The angel and employee pools get 0, and the founders get 15m each.
In scenario 2 the preferred stock gets their share, the founders come out ahead by 7m each, AND the buyer has to pay 10m less than option 1. But the angel and employees get shafted.
The stake should remain the same, but double in value. That's the risk of early investment being paid out.
I'm really surprised it doesn't work that way.
The other thing to keep in mind is that institutional investors will generally insist that founders earn out their stake via vesting over, say, 4 years. Then, the founders' stake, despite being earmarked for them, aren't officially theirs yet.
This has happened plenty of times where a startup in a dire situation had to sell itself or raise a down round with poor terms to survive and the earlier investors got wiped out.
Do angels not get terms to "cash out" in secondaries/later rounds?
I was under the impression that some angels effectively acted as bridge financing to get to later rounds (in this case A/B/C) and to then exit if they wanted to?
Always consider signaling risk.
This can be avoided by always cashing out, I guess. But it's bad for angels to always cash out, as letting it ride on the unicorns is the only way to make meaningful returns, if any.
Always consider power law.
This is the investor's perspective, but note all of these things consume a HUGE amount of time & energy from the founder(s) as well, and do nothing towards advancing your product or company. Good reminder how distracting outside funding can be - and this is AFTER you've gotten at least an angel round!
what? how does this happen exactly? i'm not aware of the normal mechanisms. are there not minority shareholder protections?
> One company that raised over $100M, with my shares at one point valued at over $1M on paper, acquired in a fire sale that returned zero to early investors
> Two others that were also “acquired” with some fanfare in the media, but returned nothing to early investors
> Four companies shut down after being unable to get to profitability or fundraise
> Four others that raised money but with painful recapitalizations that effectively wiped out early shareholders
TL;DR - Angel investing became too much like being an early employee at a startup always was, except it was actual money being lost instead of sweat equity.
Now it’s often 40% or lower of a tech salary and some gambling options
Maybe this one was just unlucky, lost money on the way and moved on.
Between this and giant PE coming downmarket, we should all just bootstrap and say “f off” to outside capital. With AI coding models, you don’t need that money to build anyway.
no, they don't. what is mega-rich keeps price inflating, but who is mega-rich are always new names.
if you are young, afauk Brin and Page have always been mega-rich, but just a little older and you remember when nobody knew who they were, nor had anybody heard of Zuck, or Musk, etc. and Jobs was a washed up has-been
Does someone have a recommendation on reading that goes deeper on this point? What enables later investors to do this? What can early investors do to protect their investment?
Talk to the few people who angel invested in google and facebook. They'll tell a different story. From their private jet.
Finding and investing in brand new businesses trying to quickly grow to hundreds of millions in revenue on reasonable terms in a highly competitive world is insanely difficult...Why would it not be? It cannot be any other way.
It’s really a trade-off. If you raise too much money, you have to at least on paper show growth. All the levers then are tuned for growth.
On the other hand, you risk loosing out in the market if you raise just enough to build a viable product and get initial customers with the goal of growing organically.
Market rewards the winners. Look at Wiz, they captured the cloud security market by raising huge capital and moving fast.
Open source route is probably the way to go if you want to build a product based on your foundational ideas. Helps drive adoption organically and hopefully discover a monetisation opportunity.
i.e. people can only lie, cheat, and steal from people for a finite amount of time. It ultimately leads to competitive disadvantage, and repercussions.
In general many VC/Angle "investors" were just predatory loan scams, that could ultimately destroy the founders firm. Warning signs often include proposals to table personal assets, share dilution scams, equity siphon holes, and stock market IPO legal cons.
Using debt to grow is generally a bad long-term strategy, and positive cash flow is always king at any scale. If the firm can't make sales, than growth is just a fools errand.
In my opinion, the Zuckerberg story ruined a generation of business people. =3
That’s why you use you initial limited window to establish conditions where you don't need to compete, remembering competitive disadvantage a non-concern.
I have seen it happen, but usually irrational "winners" also evidentially become losers in a year or two. I think it is related to folks that compulsively gamble on other peoples ignorance, and eventually end up losing in court.
It is theoretically not impossible to "win" as a bandit, but the collateral financial damage to the people around you would be significant. Thus, the mean time before collapse would be proportional to the specified credit.
Best of luck =3
"The Rules for Rulers"
https://www.youtube.com/watch?v=rStL7niR7gs
I honestly don't understand how private equity makes money at all. The playbook is:
1. Borrow a ton of money and buy a company on an LBO
2. Load up the company with debt, often complicated, exploding debt, to repay the original loan. Possibly sell off assets like real estate to pay off the original loan; and
3. Here's the kicker: sell off the company for a profit.
But we've seen time and time again that PE is a death sentence. Toys R Us, Red Lobster, numerous others. The company seemingly always explodes under the debt after the original snake oil salesman have cashed out. But my point is: who keeps falling for this and buying a PE hollowed out husk?
The other thing is that like VC, PE has become saturated, so the good opportunities just aren't there anymore.
But there are lots of well publicized lbo success stories as well. Hilton, Safeway, Dell, Nabisco. The list goes on.
Google: As I recall, two guys in a garage, literally, until they had a good start on a good business, offered to sell out for $1 million.
Amazon: Bezos and a few programmers.
FedEx: I was there early on and saw a lot of stuff about the BOD (board of directors), Founder-CEO, executives, General Dynamics, visitors from big NYC banks, funding of the airplanes, deals with Memphis to get space on/near the airport, the worker bees, etc. Was close to the action, office next to the Founder--CEO F. Smith, reported to a Senior VP with office across the hall but really reported just to Smith, was close to the BOD ("you just keep doing what you are doing until someone tells you to stop"), twice in work for the BOD enabled crucial investment and literally saved the company, etc.
Plenty of Fish: One guy, three old Dell servers, Microsoft's .NET with ASP.NET and ADO.NET, on-line romantic introduction site, sold out for $575 million.
Compared with Plenty of Fish, how Google started, and the arithmetic in the post, a summary: For the invested money: (a) Too many big, powerful chiefs, and not enough working indians. (b) Big hats, too few cattle. Too much overhead for the work done, e.g., per line of code written and running.
So, one approach: Start cheap, dirt cheap. Sole, solo founder. Only an LLC and with lawyers and accountants like, say, a grass mowing business -- LITERALLY. Founder lives cheap, say, in an area with low cost of living, in a used manufactured house, that is also the office, old used car. Take advantage of the still exploding Internet and cheap, powerful tower case computers (assembled from parts) for development and servers, $60/month 1 Gbps Internet connection, etc. Find a market need can meet with this dirt cheap approach and can get to profitibility with rapidly growing revenue.
So, leave out the time, cost, botheration of: Investors, lawyers, accountants, rented high quality offices, investor meetings, Board meetings, a management tree, manager meetings, reports to investors and the BOD, 10+ employees with all the expenses, legalities, lots of plane travel, employee stock plans, vesting, etc.
For a while, tried to raise funding; time wasted. Lesson: In simple terms, most VCs won't look at a business idea or technology before there is rapidly growing revenue. Then nearly all the VC money is used for the lawyers, other overhead, etc.
Comparison: (A) Dirt cheap: Invest $50-K a year. (B) Angel, VC, private equity approach: $10+ million a year. Big difference.
Problem: Investors need the lawyers, accountants, and other overhead so go for approach (B) where %10- of the money goes for the real work of getting the business going.
Back to work!