7 ms·

More Bad Angel Behavior

70 points by crashdev 13y ago

joshuaellinger 13y ago
How is this any different from a VC changing the terms on you at the last minute (which I am told happens routinely)? It is just another form of re-trading a deal.
- crashdev 13y ago
  I work with a ton of investors -- both angel + VC -- and this kind of opportunistic self-dealing is not condoned or tolerated by any of the professional / career investors I work with. It takes a long time -- and the help of many people -- to build a real business and folks who want to stay in the early-stage game don't pull shit like this because it undermines trust among both founders and fellow investors when you need it the most.
  - joshuaellinger 13y ago
    I certainly agree that it undermines trust but don't VCs routinely change terms at the last minute in a series A or B? Is that really uncommon when you get to the professionals? I've never had to deal with this myself but I am told that it happens all the time. You think you have a deal and then you get a last minute call that says we can't do that evaluation or we want some extra warrants. The rule I have always heard is "you don't have a deal until the check clears".
    - crapshoot101 13y ago
      No, they don't. The fact that someone here got screwed once does not in fact suggest this practice is the modus operandi. VC's are not out to screw you, and if nothing else, the reputational harm of the actions you described would be immense. Respectively, this sounds like a naive, 2nd hand perspective.
  - rabbitonrails 13y ago
    Working with a ton of investors -- both angel and VC -- does not the private phone call make.
- ChuckMcM 13y ago
  I've only ever experienced that with 'new' people to venture capital. Basically bringing a short term view to a long term game. Fortunately the ones I've met who have done that have not stayed in the game long (I don't know if the partners ask them to leave or they just stop getting deals, but I've not met anyone who has 'lasted' with that sort of approach).
- jacquesm 13y ago
  Changing terms at the last minute would be an excellent way to lose a deal and no VC that is in it for the long haul will pull a stunt like that unprompted. When it does happen, more often than not (at least, in most cases I'm familiar with) it was to compensate for things disclosed just prior to doing a deal. If such a disclosure does not scuttle the deal entirely the least you should count on is an adjustment. That's why you make sure there is a high level of transparency by the time a terms sheet is signed, you're in for a rough ride if you have not been up-front about any lingering issues.
austenallred 13y ago
There's no way this is a trend, is it? That's pretty much as low as it gets - "give me additional equity for doing my job." What recourse does a founder have if this happens?
- karamazov 13y ago
  You say no.
  - Patrick_Devine 13y ago
    I'm guessing it's a bluff anyway. Presumably they have their own money on the line, so sabotaging their investment is against their own interests. If the CEO caves the angel walks away with more equity for nothing. If he doesn't, no harm in asking, right? I think the appropriate response is to thank the angel and be appreciative of their contributions but explain that there is no more equity to give.
    - robryan 13y ago
      Yeah, I just don't see how the angel investor has all the power here if they are interested in getting something back from the investment.
  - omegant 13y ago
    I'll rather close than keep working with someone that's playing that game. Even if they pull back that maneuver, I'll have to think a lot to sign that round.
7Figures2Commas 13y ago
> Companies are at their most vulnerable just before a new financing, when cash is short and all hands are required on deck to get the next round closed. I think it would be more accurate to write "Companies are at their most vulnerable when cash is short and they're not generating enough of it to support their operations and growth." When you play Build A Business With Someone Else's Money and your execution (or lack thereof) leaves you in position where you need more money from Someone Else, you can lament the fact that Someone Else has significantly more leverage than you or you can acknowledge that this was a possible outcome of the risk you decided to take.
- crashdev 13y ago
  In my experience the startup community (both founders + funders) is heavily skewed toward people who believe that creating value takes time and teamwork, and that any premature + asymmetric effort to capture value is just counterproductive. Very few really big companies in tech have been built by bootstrapping -- it offers the illusion of control, but typically at the expense of impact.
  - rabbitonrails 13y ago
    What is a "premature + asymmetric effort to capture value" and how is it "counterproductive", and to whom, and how does it relate to bootstrapping at the expense of the "time and teamwork" towards which the rest of the "startup community" is "heavily skewed"?
    - webwright 13y ago
      I can't quite tell if you're being snarky/obtuse, but I'll assume you're not. I believe he means that if you need to make a profit to survive, it'll inhibit growth, impact, and market share. Example: Say Amazon was bootstrapped. They couldn't have run profit-free for years like they did. The result of bootstrapping Amazon? Higher prices. Slow hiring. No marketing. Little-to-no cash for R&D. Maybe company-death because they couldn't afford to wait for the market to catch up with their vision. Or maybe a faster-moving competitor now has room to move in and take the leadership role. Do you think Amazon made the wrong choice to raise money, assuming Bezos' wish was a combination of impact-on-the-world and wealth?
trotsky 13y ago
an egregious violation of investor trust and ethics. I agree that this kind of behavior is too obvious and not socially acceptable or common practice. But the concept of the modern style of silicon valley private equity industry (of which angels are obviously within the broad ecosystem) as that operates with any substantial amount of ethics or is deserving of or even expecting trust is so far from my experiences as to be laughable. They just are very loathe to be as obvious, or apply pressure without sufficient supporting influence. If you've been sitting at the poker table for 30 minutes and you can't tell who the sucker is, it's you.
CurtMonash 13y ago
According to the article's author, companies are entitled to more or less unlimited free services from investors. Some people may disagree with that view. Personally, I don't invest cash in start-ups at all, except for founder's stock at truly nominal prices. (I once paid $100 for 1% of a company that soon was backed by AH, Google Ventures & other name-brand VCs.) If they want my services, they can pay cash or offer attractive equity. In another case, I asked for and received 5% of the founder stock, and was very glad I did when the CEO went for a cheap and early acquihire, with me getting ~1% of the take after retention options and participating-preferred stock.
- ryanbrunner 13y ago
  I think that's stretching his point somewhat. Renegotiating the terms of your relationship in general isn't what he's arguing against, it's more about intentionally pulling the rug out from a company and demanding equity immediately before a funding round. That doesn't really imply good faith bargaining, and is really a lot closer to blackmail ("I'll make this deal tank and your company will go under unless I get 1% more")
  - CurtMonash 13y ago
    The article links to an earlier article of his. He does seem as extreme as I suggested, more or less. I also don't see what's wrong with the behavior he was criticizing. It seems that the offending angel said "If you want me to do more of what I have in the past, please pay me something." If the angel did something worse than that, he wasn't clear in explaining how or why.
brianmcconnell 13y ago
The investor doesn't sound very sophisticated (sounds pretty stupid actually). The company is about to clear a hurdle that most startups don't, so the investor decides to be greedy and potentially throw a wrench into the whole deal to maximize his short term gain. I would throw him a bone by creating an option for seed investors to cash out in future rounds of funding, or create some sort of compensation plan if his concern is about his time commitment. Otherwise, suck on it. If he doesn't like the risks associated with startup finance, he can put his money in an index fund and go play shuffleboard.
viennacoder 13y ago
Maybe I'm missing something, but I don't really see what's wrong with this. The angel paid for his shares with cash. If he's also working for the business -- and driving significant value, it sounds like -- he has a right to ask for compensation for his work. And the founders have a right to say no. Now if he's threatening to torpedo the current deal, that's just childish and stupid.

70 points by crashdev 13y ago

How is this any different from a VC changing the terms on you at the last minute (which I am told happens routinely)? It is just another form of re-trading a deal.

crashdev 13y ago
I work with a ton of investors -- both angel + VC -- and this kind of opportunistic self-dealing is not condoned or tolerated by any of the professional / career investors I work with. It takes a long time -- and the help of many people -- to build a real business and folks who want to stay in the early-stage game don't pull shit like this because it undermines trust among both founders and fellow investors when you need it the most.
- joshuaellinger 13y ago
  I certainly agree that it undermines trust but don't VCs routinely change terms at the last minute in a series A or B? Is that really uncommon when you get to the professionals? I've never had to deal with this myself but I am told that it happens all the time. You think you have a deal and then you get a last minute call that says we can't do that evaluation or we want some extra warrants. The rule I have always heard is "you don't have a deal until the check clears".
  - crapshoot101 13y ago
    No, they don't. The fact that someone here got screwed once does not in fact suggest this practice is the modus operandi. VC's are not out to screw you, and if nothing else, the reputational harm of the actions you described would be immense. Respectively, this sounds like a naive, 2nd hand perspective.
- rabbitonrails 13y ago
  Working with a ton of investors -- both angel and VC -- does not the private phone call make.
ChuckMcM 13y ago
I've only ever experienced that with 'new' people to venture capital. Basically bringing a short term view to a long term game. Fortunately the ones I've met who have done that have not stayed in the game long (I don't know if the partners ask them to leave or they just stop getting deals, but I've not met anyone who has 'lasted' with that sort of approach).
jacquesm 13y ago
Changing terms at the last minute would be an excellent way to lose a deal and no VC that is in it for the long haul will pull a stunt like that unprompted. When it does happen, more often than not (at least, in most cases I'm familiar with) it was to compensate for things disclosed just prior to doing a deal. If such a disclosure does not scuttle the deal entirely the least you should count on is an adjustment. That's why you make sure there is a high level of transparency by the time a terms sheet is signed, you're in for a rough ride if you have not been up-front about any lingering issues.

austenallred 13y ago

There's no way this is a trend, is it? That's pretty much as low as it gets - "give me additional equity for doing my job." What recourse does a founder have if this happens?

karamazov 13y ago
You say no.
- Patrick_Devine 13y ago
  I'm guessing it's a bluff anyway. Presumably they have their own money on the line, so sabotaging their investment is against their own interests. If the CEO caves the angel walks away with more equity for nothing. If he doesn't, no harm in asking, right? I think the appropriate response is to thank the angel and be appreciative of their contributions but explain that there is no more equity to give.
  - robryan 13y ago
    Yeah, I just don't see how the angel investor has all the power here if they are interested in getting something back from the investment.
- omegant 13y ago
  I'll rather close than keep working with someone that's playing that game. Even if they pull back that maneuver, I'll have to think a lot to sign that round.

7Figures2Commas 13y ago

> Companies are at their most vulnerable just before a new financing, when cash is short and all hands are required on deck to get the next round closed. I think it would be more accurate to write "Companies are at their most vulnerable when cash is short and they're not generating enough of it to support their operations and growth." When you play Build A Business With Someone Else's Money and your execution (or lack thereof) leaves you in position where you need more money from Someone Else, you can lament the fact that Someone Else has significantly more leverage than you or you can acknowledge that this was a possible outcome of the risk you decided to take.

crashdev 13y ago
In my experience the startup community (both founders + funders) is heavily skewed toward people who believe that creating value takes time and teamwork, and that any premature + asymmetric effort to capture value is just counterproductive. Very few really big companies in tech have been built by bootstrapping -- it offers the illusion of control, but typically at the expense of impact.
- rabbitonrails 13y ago
  What is a "premature + asymmetric effort to capture value" and how is it "counterproductive", and to whom, and how does it relate to bootstrapping at the expense of the "time and teamwork" towards which the rest of the "startup community" is "heavily skewed"?
  - webwright 13y ago
    I can't quite tell if you're being snarky/obtuse, but I'll assume you're not. I believe he means that if you need to make a profit to survive, it'll inhibit growth, impact, and market share. Example: Say Amazon was bootstrapped. They couldn't have run profit-free for years like they did. The result of bootstrapping Amazon? Higher prices. Slow hiring. No marketing. Little-to-no cash for R&D. Maybe company-death because they couldn't afford to wait for the market to catch up with their vision. Or maybe a faster-moving competitor now has room to move in and take the leadership role. Do you think Amazon made the wrong choice to raise money, assuming Bezos' wish was a combination of impact-on-the-world and wealth?

trotsky 13y ago

an egregious violation of investor trust and ethics. I agree that this kind of behavior is too obvious and not socially acceptable or common practice. But the concept of the modern style of silicon valley private equity industry (of which angels are obviously within the broad ecosystem) as that operates with any substantial amount of ethics or is deserving of or even expecting trust is so far from my experiences as to be laughable. They just are very loathe to be as obvious, or apply pressure without sufficient supporting influence. If you've been sitting at the poker table for 30 minutes and you can't tell who the sucker is, it's you.

CurtMonash 13y ago

According to the article's author, companies are entitled to more or less unlimited free services from investors. Some people may disagree with that view. Personally, I don't invest cash in start-ups at all, except for founder's stock at truly nominal prices. (I once paid $100 for 1% of a company that soon was backed by AH, Google Ventures & other name-brand VCs.) If they want my services, they can pay cash or offer attractive equity. In another case, I asked for and received 5% of the founder stock, and was very glad I did when the CEO went for a cheap and early acquihire, with me getting ~1% of the take after retention options and participating-preferred stock.

ryanbrunner 13y ago
I think that's stretching his point somewhat. Renegotiating the terms of your relationship in general isn't what he's arguing against, it's more about intentionally pulling the rug out from a company and demanding equity immediately before a funding round. That doesn't really imply good faith bargaining, and is really a lot closer to blackmail ("I'll make this deal tank and your company will go under unless I get 1% more")
- CurtMonash 13y ago
  The article links to an earlier article of his. He does seem as extreme as I suggested, more or less. I also don't see what's wrong with the behavior he was criticizing. It seems that the offending angel said "If you want me to do more of what I have in the past, please pay me something." If the angel did something worse than that, he wasn't clear in explaining how or why.

brianmcconnell 13y ago

The investor doesn't sound very sophisticated (sounds pretty stupid actually). The company is about to clear a hurdle that most startups don't, so the investor decides to be greedy and potentially throw a wrench into the whole deal to maximize his short term gain. I would throw him a bone by creating an option for seed investors to cash out in future rounds of funding, or create some sort of compensation plan if his concern is about his time commitment. Otherwise, suck on it. If he doesn't like the risks associated with startup finance, he can put his money in an index fund and go play shuffleboard.

viennacoder 13y ago

Maybe I'm missing something, but I don't really see what's wrong with this. The angel paid for his shares with cash. If he's also working for the business -- and driving significant value, it sounds like -- he has a right to ask for compensation for his work. And the founders have a right to say no. Now if he's threatening to torpedo the current deal, that's just childish and stupid.