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Don't underestimate the value of the angel investor being a person you can talk to. I've made several angel investments, and sometimes the company needed to res

by tlb 7y ago

Don't underestimate the value of the angel investor being a person you can talk to. I've made several angel investments, and sometimes the company needed to restructure in a way that a strictly profit-focused institutional investor would not have allowed. Since I invest mainly because it's interesting and it helps people, I've never said no to what the founders wanted to do. Of course, individual angels can be hard-asses. But an institutional fund is legally required to be a hard-ass. So I agree with Aaron's advice: you should know exactly whose money you're taking, and go for as long as possible only taking money from people you can reason with. If you don't have a good sense of the investor, ask a founder they invested in where the company ran into trouble.

lann 7y ago
> institutional fund is legally required to be a hard-ass What do you mean by this?
- sansnomme 7y ago
  There are laws/expectations that state a company must optimize for profits (Dodge v Ford). Perhaps this what is meant.
  - wtetzner 7y ago
    Is that for all companies, or just publicly traded companies?
  - elcritch 7y ago
    It's a common myth, and may be for certain states, but in general it doesn't appear to true in the US [1, 2]. 1: https://www.nytimes.com/roomfordebate/2015/04/16/what-are-corporations-obligations-to-shareholders/corporations-dont-have-to-maximize-profits https://www.nytimes.com/roomfordebate/2015/04/16/what-are-co... 2: https://www.nakedcapitalism.com/2014/05/guess-who-is-responsible-for-the-corporations-exist-to-maximize-shareholder-value-myth.html https://www.nakedcapitalism.com/2014/05/guess-who-is-respons...
  - mattkrause 7y ago
    No, that’s a misconception. While Dodge v. Ford does say that companies should be run for the benefit of the shareholders, it gives management a ton of latitude in deciding how to do so. Here’s a quote from the actual text: “[T]he ultimate results of the larger business cannot be certainly estimated. The judges are not business experts. It is recognized that plans must often be made for a long future, for expected competition, for a continuing as well as an immediately profitable venture...” Shlensky v. Wrigley deals with the Chicago Cubs’ refusal to install lighting for nighttime games, due to concerns about how it would affect the game of baseball (which their president believed was “a daytime sport”) and the surrounding neighborhood. Although these are fairly nebulous concerns, the court held they were reasonable business judgements. The decision cites another case, Davis v Louisville Gas and Electric Co, which says “the directors are chosen to pass upon such questions and their judgment unless shown to be tainted with fraud is accepted as final. The judgment the directors of the corporation enjoys the benefit of a presumption that it was formed in good faith, and was designed to promote the best interests of the corporation they serve.” The standard, from In Re Walt Disney, is that business decisions aren’t reviewable unless “the exchange was so one-sided that no business person of ordinary, sound judgment could conclude that the corporation has received adequate consideration".
    - jaredklewis 7y ago
      This comment is amazing. I feel like the phrase "companies must maximize shareholder value" is regurgitated dozens of times daily on HN without anyone stopping to think about how meaninglessly broad the statement is. Pretty much the only time that fiduciary duty ever comes up (in the sense that it is constantly discussed online) is cases that run up against the Revlon Rule, where you actually have competing offers to buy a company. But there really aren't very many of those.
- herdrick 7y ago
  Fiduciary duty.
logicallee 7y ago
Not to pry, but I'd be curious to know how those investments did for you, if you don't mind sharing! Institutional investors often succeed at nabbing seed-stage investments then holding onto them through 10,000%+ profit. In fact, I heard that in most cases, a few outsize successes are responsible for most of an institutional portfolio's returns.
- tlb 7y ago
  Better not to count the chickens before they hatch. In general, with companies that are doing well, I'm doing as well as any investor would. With companies that failed, I walked away with $0 and no hard feelings. There are some in the middle that an aggressive investor could have gotten more money out of in return for some hard feelings. But as you say, most of the returns come from the big wins so it's best to spend your effort on finding more of them.
  - logicallee 7y ago
    Thanks for this answer. I actually thought you might have to be aggressive not to be diluted, on your companies that are doing well. (Like they would just ask you to sign new paperwork since they're more valuable now, and an angel might cave and do so, since they're still getting a "fair" return. Actually I thought that was the point at which investors have to be hardest.)
burnte 7y ago
"But an institutional fund is legally required to be a hard-ass." This isn't true in the sense most people think it is. It's true that management must act in the best interests of the shareholders, but the legal requirement is more about acting in an ethically or financially defensible way, rather than dollars above all else. It is perfectly legal for management or an investment bank to allow the entity to act in ways that benefit in the long term but not the short term. The greatest example of this in modern business is Amazon. Bezos sees that getting a large, long-term-viable business means putting profits right back into the company, and sometimes even running debt. No where in any laws and regulations is any manager or investor required to sell tomorrow in order to maximize profit today. If a founder in a startup has a wacky idea, but the board/ownership/etc. feel that the plan can work, they CAN permit it with no legal repercussion. Fiduciary duty is about ethical action, not profit, they can't knowingly in a manner that is deleterious to investors/shareholders. And even that low bar is very hard to prove in court.
- tlb 7y ago
  LPs aren't just shareholders. I wish. LP agreements are hundreds of pages long! A complication with institutional funds is that they raise a new fund every couple years, with a changing set of LPs. So they can't make a deal like "we can write off the investment in your previous company, if you let us invest in your new company" because it's favoring one set of LPs over another. LPs get prickly about that. So a company like Amazon can take lower profits now in return for bigger profits later, but institutional funds can't if they're into the next fund.
  - nostrademons 7y ago
    LPs themselves also have basically zero information to go on when evaluating a potential venture fund, other than exits they invested in with their previous fund. And the competition is pretty brutal among venture funds today. So a VC is going to have a very hard time raising money for their next fund if they can't show exits or at least follow-on rounds of funding at substantially higher valuations for some of their previous portfolio companies.

by tlb 7y ago

lann 7y ago

> institutional fund is legally required to be a hard-ass What do you mean by this?

sansnomme 7y ago
There are laws/expectations that state a company must optimize for profits (Dodge v Ford). Perhaps this what is meant.
- wtetzner 7y ago
  Is that for all companies, or just publicly traded companies?
- elcritch 7y ago
  It's a common myth, and may be for certain states, but in general it doesn't appear to true in the US [1, 2]. 1: https://www.nytimes.com/roomfordebate/2015/04/16/what-are-corporations-obligations-to-shareholders/corporations-dont-have-to-maximize-profits https://www.nytimes.com/roomfordebate/2015/04/16/what-are-co... 2: https://www.nakedcapitalism.com/2014/05/guess-who-is-responsible-for-the-corporations-exist-to-maximize-shareholder-value-myth.html https://www.nakedcapitalism.com/2014/05/guess-who-is-respons...
- mattkrause 7y ago
  No, that’s a misconception. While Dodge v. Ford does say that companies should be run for the benefit of the shareholders, it gives management a ton of latitude in deciding how to do so. Here’s a quote from the actual text: “[T]he ultimate results of the larger business cannot be certainly estimated. The judges are not business experts. It is recognized that plans must often be made for a long future, for expected competition, for a continuing as well as an immediately profitable venture...” Shlensky v. Wrigley deals with the Chicago Cubs’ refusal to install lighting for nighttime games, due to concerns about how it would affect the game of baseball (which their president believed was “a daytime sport”) and the surrounding neighborhood. Although these are fairly nebulous concerns, the court held they were reasonable business judgements. The decision cites another case, Davis v Louisville Gas and Electric Co, which says “the directors are chosen to pass upon such questions and their judgment unless shown to be tainted with fraud is accepted as final. The judgment the directors of the corporation enjoys the benefit of a presumption that it was formed in good faith, and was designed to promote the best interests of the corporation they serve.” The standard, from In Re Walt Disney, is that business decisions aren’t reviewable unless “the exchange was so one-sided that no business person of ordinary, sound judgment could conclude that the corporation has received adequate consideration".
  - jaredklewis 7y ago
    This comment is amazing. I feel like the phrase "companies must maximize shareholder value" is regurgitated dozens of times daily on HN without anyone stopping to think about how meaninglessly broad the statement is. Pretty much the only time that fiduciary duty ever comes up (in the sense that it is constantly discussed online) is cases that run up against the Revlon Rule, where you actually have competing offers to buy a company. But there really aren't very many of those.
herdrick 7y ago
Fiduciary duty.

logicallee 7y ago

Not to pry, but I'd be curious to know how those investments did for you, if you don't mind sharing! Institutional investors often succeed at nabbing seed-stage investments then holding onto them through 10,000%+ profit. In fact, I heard that in most cases, a few outsize successes are responsible for most of an institutional portfolio's returns.

tlb 7y ago
Better not to count the chickens before they hatch. In general, with companies that are doing well, I'm doing as well as any investor would. With companies that failed, I walked away with $0 and no hard feelings. There are some in the middle that an aggressive investor could have gotten more money out of in return for some hard feelings. But as you say, most of the returns come from the big wins so it's best to spend your effort on finding more of them.
- logicallee 7y ago
  Thanks for this answer. I actually thought you might have to be aggressive not to be diluted, on your companies that are doing well. (Like they would just ask you to sign new paperwork since they're more valuable now, and an angel might cave and do so, since they're still getting a "fair" return. Actually I thought that was the point at which investors have to be hardest.)

burnte 7y ago

"But an institutional fund is legally required to be a hard-ass." This isn't true in the sense most people think it is. It's true that management must act in the best interests of the shareholders, but the legal requirement is more about acting in an ethically or financially defensible way, rather than dollars above all else. It is perfectly legal for management or an investment bank to allow the entity to act in ways that benefit in the long term but not the short term. The greatest example of this in modern business is Amazon. Bezos sees that getting a large, long-term-viable business means putting profits right back into the company, and sometimes even running debt. No where in any laws and regulations is any manager or investor required to sell tomorrow in order to maximize profit today. If a founder in a startup has a wacky idea, but the board/ownership/etc. feel that the plan can work, they CAN permit it with no legal repercussion. Fiduciary duty is about ethical action, not profit, they can't knowingly in a manner that is deleterious to investors/shareholders. And even that low bar is very hard to prove in court.

tlb 7y ago
LPs aren't just shareholders. I wish. LP agreements are hundreds of pages long! A complication with institutional funds is that they raise a new fund every couple years, with a changing set of LPs. So they can't make a deal like "we can write off the investment in your previous company, if you let us invest in your new company" because it's favoring one set of LPs over another. LPs get prickly about that. So a company like Amazon can take lower profits now in return for bigger profits later, but institutional funds can't if they're into the next fund.
- nostrademons 7y ago
  LPs themselves also have basically zero information to go on when evaluating a potential venture fund, other than exits they invested in with their previous fund. And the competition is pretty brutal among venture funds today. So a VC is going to have a very hard time raising money for their next fund if they can't show exits or at least follow-on rounds of funding at substantially higher valuations for some of their previous portfolio companies.