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.
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")
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.
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.
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.
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".
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.
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).
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.
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.
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?
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.
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.
> 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.
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.
Apple was not bootstrapped. Don Valentine (Sequoia), Arthur Rock (Venrock) were VCs to put money into Apple after angel investment from Markkula in 77. David Morgenthaler was also an early investor.
It's not entirely clear to me how Microsoft was financed, but there was absolutely outside financing (August Capital: http://en.wikipedia.org/wiki/David_Marquardt ). Also, Bill Gates was born pretty rich. "His father was a prominent lawyer, and his mother served on the board of directors for First Interstate BancSystem and the United Way. Gates's maternal grandfather was JW Maxwell, a national bank president." (from https://en.wikipedia.org/wiki/Bill_Gates). I'd wager his folks were angel investors in one form or another.
A successful business does everything it can to make money as soon as it can. It can take investments because bootstrapping doesn't make sense in many situation (growth would be too slow), but saying premature + asymmetric effort to capture value is just counterproductive is actually exactly the opposite of what works.
A business needs to make money as soon as it can. It's how it survives. Facebook and Twitter are exceptions.
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"?
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?
I won't suggest that asymmetric effort to capture value might not be counterproductive in some instances, but let's not suggest that founders view their interactions with professional investors through rose-colored glasses either.
As for bootstrapping: sadly, lots of young and inexperienced entrepreneurs underestimate how much money they'll need to execute. That's not a control issue; that's a starting-a-business-when-you-have-no-business-starting-a-business issue.
Finally, the word "big" is too subjective to have any real meaning here. If you told a group of first-time entrepreneurs that they could own 100% of a highly-profitable multi-million dollar a year business, most would probably tell you that's "big enough." And even though many of them fly under the radar, there are a countless number of those businesses in and out of the tech world.
If you've committed to an ideological position that bootstrapping is the only valid way to start a business, you have nothing useful to offer on the topic of how to raise money well and what to look out for.
It's the same way that an anarchist cannot make sensible statements on tax policy. "Taxation is theft" isn't an argument for or against eliminating the mortgage interest deduction, it's just an irrelevant distraction.
In practice there's often not. Perhaps early on, but heavily VC funded start-ups are likely going to have a board that's somewhat hostile to slow, careful growth with a focus on profitability.
I fail to see how you could read my comment and draw the conclusion that I am committed to an ideological position that bootstrapping is the only valid way to start a business because I implied no such thing.
Many businesses require capital, and it's worth noting that equity isn't the only means by which it can be raised. This said, money isn't free (except in certain financial centers of course) and the people and institutions providing it generally aren't doing so out of the goodness of their hearts. My comment simply points that out.
Want something useful? How's this: it's easier to raise capital on reasonable/favorable terms when you don't need it. In other words, put yourself in a position where you're raising capital to grow, make bigger investments earlier, etc., not to make next month's payroll. I always figured this was common sense, but in Silicon Valley, more than a few people seem to believe that the way to build a business is to return to the funding trough every time you've exhausted your last round of funding.
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.
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.