

More Bad Angel Behavior - crashdev
http://www.crashdev.com/2013/07/more-bad-angel-behavior.html

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CurtMonash
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
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
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.

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trotsky
_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.

------
joshuaellinger
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
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
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
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.

------
brianmcconnell
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.

------
austenallred
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
You say no.

~~~
Patrick_Devine
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
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.

------
7Figures2Commas
> 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
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.

~~~
jmduke
Would you call say Microsoft and Apple were built through bootstrapping?

(I am not trying to be snarky. What's your definition of bootstrapping?)

~~~
webwright
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](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](https://en.wikipedia.org/wiki/Bill_Gates)).
I'd wager his folks were angel investors in one form or another.

------
viennacoder
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.

