4 ms·

Wouldn't a contract solve this? In terms of being able and willing to sue if they start taking liberties, I'm more than willing to do this, although knowing th

by brador 15y ago

Wouldn't a contract solve this? In terms of being able and willing to sue if they start taking liberties, I'm more than willing to do this, although knowing the two founder personalities I don't see this being that big an issue. I note your point about being hand-off. It's something I didn't consider earlier. The question of "what if they decide to quit/change direction to one that sucks?" is something I missed and will consdier further. The main issue I have is with me taking 20% of the current company, what are the methods I need to look out for that future investors can screw me down to 0% equity?

gyardley 15y ago
Shares generally don't vaporize once issued, although you'll certainly experience dilution as new shares are issued unless you keep putting money in to preserve your stake. You'll also always be behind the new money in the preferences stack - newer investors get paid back first. You shouldn't be angel investing, though - not if you'd actually consider suing founders because they might change the direction of their company to one you disagree with, or because they might decide to wind down the company should they fail and be unable to raise more capital. Both of those things are pretty normal, and the way angel investors deal with them isn't to come up with non-standard contractual terms, it's to have a portfolio of many angel investments, so their risk is distributed. If you're only going to be investing in one, you've just got to accept that you've got a very high chance of losing 100% of your investment. Founder malfeasance is the least of your worries - you'll lose it because most companies fail despite their founders' best efforts. All you're going to do here is end up introducing non-standard terms into your investment paperwork which are going to scare away future investors and make the company you're investing in less likely to succeed.
- brador 15y ago
  Apologies for the misunderstanding, I meant I would not hesitate to sue if an appropriate situation arised. Suing because of a pivot is not something I would consider. That last sentence is an eye opener and I will now avoid non-standard terms. Is there a list/source of some expected standard terms for startup investment? Lastly, do you know of any good sources (other than the PG article mentioned by Patio1 above) on the subject of angel investing? Any good books/sites?
  - swalkergibson 15y ago
    Here is a blog post from Fred Wilson with a passel of standardized funding docs. http://www.avc.com/a_vc/2010/03/standardized-venture-funding-docs.html http://www.avc.com/a_vc/2010/03/standardized-venture-funding...
  - gyardley 15y ago
    Hmmm. I'd just go through all the links here, since Gabe did a great job curating the best stuff online: http://www.gabrielweinberg.com/blog/2010/06/how-to-learn-about-angelvc-term-sheets.html http://www.gabrielweinberg.com/blog/2010/06/how-to-learn-abo... I should probably step back from what I said earlier and stress that there's not one canonical set of 'standard terms' - there's just terms that are typical and terms that are rarely or never seen. Unless there's a compelling reason, I'd keep things typical. I'd also Google and read up on convertible debt, which might be a good option. There are pros and cons to convertible debt, but the associated legal costs of doing convertible debt are generally lower, so a big chunk of the money you're investing won't immediately get eaten up by lawyers. You can't avoid legal bills - whatever route you take, the company will need a lawyer with relevant experience. But you can minimize the cost.
lisper 15y ago
Sorry for not responding sooner... I've been on the road. First, they can't screw you down to 0%. Your shares are always your shares. You can be diluted down to epsilon, but not to zero. Also, the board has a legal fiduciary responsibility to act in the best interests of the shareholders, so there are limits to how capricious they can be. At the very least they have to be able to provide themselves with plausible deniability that what they are doing is in your interests. There are two legal mechanisms for avoiding future dilution. One is to have a class of non-dilutable stock, but that is hardly ever done. It's a huge red flag for future investors. The other is to have a ride-along clause that gives you the option to participate in future rounds to maintain your current percentage share. It is rare NOT to have this clause, but the problem with that is, obviously, you have to be able to come up with the cash. But by far your best option, since your stake is so high, is to take a board seat. Being on a board is all that time consuming, and it looks good on a resume too.

by brador 15y ago

gyardley 15y ago

Shares generally don't vaporize once issued, although you'll certainly experience dilution as new shares are issued unless you keep putting money in to preserve your stake. You'll also always be behind the new money in the preferences stack - newer investors get paid back first. You shouldn't be angel investing, though - not if you'd actually consider suing founders because they might change the direction of their company to one you disagree with, or because they might decide to wind down the company should they fail and be unable to raise more capital. Both of those things are pretty normal, and the way angel investors deal with them isn't to come up with non-standard contractual terms, it's to have a portfolio of many angel investments, so their risk is distributed. If you're only going to be investing in one, you've just got to accept that you've got a very high chance of losing 100% of your investment. Founder malfeasance is the least of your worries - you'll lose it because most companies fail despite their founders' best efforts. All you're going to do here is end up introducing non-standard terms into your investment paperwork which are going to scare away future investors and make the company you're investing in less likely to succeed.

brador 15y ago
Apologies for the misunderstanding, I meant I would not hesitate to sue if an appropriate situation arised. Suing because of a pivot is not something I would consider. That last sentence is an eye opener and I will now avoid non-standard terms. Is there a list/source of some expected standard terms for startup investment? Lastly, do you know of any good sources (other than the PG article mentioned by Patio1 above) on the subject of angel investing? Any good books/sites?
- swalkergibson 15y ago
  Here is a blog post from Fred Wilson with a passel of standardized funding docs. http://www.avc.com/a_vc/2010/03/standardized-venture-funding-docs.html http://www.avc.com/a_vc/2010/03/standardized-venture-funding...
- gyardley 15y ago
  Hmmm. I'd just go through all the links here, since Gabe did a great job curating the best stuff online: http://www.gabrielweinberg.com/blog/2010/06/how-to-learn-about-angelvc-term-sheets.html http://www.gabrielweinberg.com/blog/2010/06/how-to-learn-abo... I should probably step back from what I said earlier and stress that there's not one canonical set of 'standard terms' - there's just terms that are typical and terms that are rarely or never seen. Unless there's a compelling reason, I'd keep things typical. I'd also Google and read up on convertible debt, which might be a good option. There are pros and cons to convertible debt, but the associated legal costs of doing convertible debt are generally lower, so a big chunk of the money you're investing won't immediately get eaten up by lawyers. You can't avoid legal bills - whatever route you take, the company will need a lawyer with relevant experience. But you can minimize the cost.

lisper 15y ago

Sorry for not responding sooner... I've been on the road. First, they can't screw you down to 0%. Your shares are always your shares. You can be diluted down to epsilon, but not to zero. Also, the board has a legal fiduciary responsibility to act in the best interests of the shareholders, so there are limits to how capricious they can be. At the very least they have to be able to provide themselves with plausible deniability that what they are doing is in your interests. There are two legal mechanisms for avoiding future dilution. One is to have a class of non-dilutable stock, but that is hardly ever done. It's a huge red flag for future investors. The other is to have a ride-along clause that gives you the option to participate in future rounds to maintain your current percentage share. It is rare NOT to have this clause, but the problem with that is, obviously, you have to be able to come up with the cash. But by far your best option, since your stake is so high, is to take a board seat. Being on a board is all that time consuming, and it looks good on a resume too.