What are some evil angel investing practices?

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JASON LEMKIN

I don’t think any term per se is evil. Fundraising is a negotiation. You don’t have to take the terms. No one is forcing you to take the money.

But … it is easy to take advantage of early-stage entrepreneurs, especially in “soft” terms besides valuation. This is not only “wrong” but can set a startup up for challenges down road.

Things that are “wrong” if you intend to raise venture financing later:

  • A further option (but not obligation) to continue to invest at same price. This can severely harm your ability to further fundraise, at least if the % is material.
  • Selling 50%+ or more upfront. If you sell too much upfront — even if you want to — later tech investors will be too concerned about your incentive structure. As founders, of course you will be diluted each round. But if you are too diluted in the angel round, most professional investors won’t see it all working out well.
  • Put option. Having the right to “put” your shares back to a startup can make some theoretical sense, but in practice, it is inconsistent with the 8–18 years it takes to build an important startup.
  • Weird “chairmainships” and operating roles by your investors. Sometimes, angels put themselves in as “chairpeople” or other odd roles, take significant salaries, and act as executives. This may make sense in certain semi-buy out situations, but not in venture-backed startups.

One note: none of these mistakes are necessarily fatal. Some investors will still be OK with these terms. And a VC that really wants to invest will make renegotiating them a condition of investing, however (this is what I do). And that may be a bunch of really, really tough discussions.

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Published on January 17, 2018
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