
“Angels” that aren’t actually angels, and the problems that poses - akharris
https://blog.ycombinator.com/angels-angels-and-vcs/
======
tlb
Don't underestimate the value of the angel investor being a person you can
talk to. I've made several angel investments, and sometimes the company needed
to restructure in a way that a strictly profit-focused institutional investor
would not have allowed. Since I invest mainly because it's interesting and it
helps people, I've never said no to what the founders wanted to do.

Of course, individual angels can be hard-asses. But an institutional fund is
legally required to be a hard-ass. So I agree with Aaron's advice: you should
know exactly whose money you're taking, and go for as long as possible only
taking money from people you can reason with. If you don't have a good sense
of the investor, ask a founder they invested in where the company ran into
trouble.

~~~
lann
> institutional fund is legally required to be a hard-ass

What do you mean by this?

~~~
sansnomme
There are laws/expectations that state a company must optimize for profits
(Dodge v Ford). Perhaps this what is meant.

~~~
mattkrause
No, that’s a misconception.

While Dodge v. Ford does say that companies should be run for the benefit of
the shareholders, it gives management a _ton_ of latitude in deciding how to
do so. Here’s a quote from the actual text: “[T]he ultimate results of the
larger business cannot be certainly estimated. _The judges are not business
experts_. It is recognized that plans must often be made for a long future,
for expected competition, for a continuing as well as an immediately
profitable venture...”

Shlensky v. Wrigley deals with the Chicago Cubs’ refusal to install lighting
for nighttime games, due to concerns about how it would affect the game of
baseball (which their president believed was “a daytime sport”) and the
surrounding neighborhood. Although these are fairly nebulous concerns, the
court held they were reasonable business judgements. The decision cites
another case, Davis v Louisville Gas and Electric Co, which says “the
directors are chosen to pass upon such questions and their judgment unless
shown to be tainted with fraud is accepted as final. The judgment the
directors of the corporation enjoys the benefit of a presumption that it was
formed in good faith, and was designed to promote the best interests of the
corporation they serve.”

The standard, from In Re Walt Disney, is that business decisions aren’t
reviewable unless “the exchange was so one-sided that no business person of
ordinary, sound judgment could conclude that the corporation has received
adequate consideration".

~~~
jaredklewis
This comment is amazing. I feel like the phrase "companies must maximize
shareholder value" is regurgitated dozens of times daily on HN without anyone
stopping to think about how meaninglessly broad the statement is.

Pretty much the only time that fiduciary duty ever comes up (in the sense that
it is constantly discussed online) is cases that run up against the Revlon
Rule, where you actually have competing offers to buy a company. But there
really aren't very many of those.

------
throwmeplz700
Throwaway account for obvious reasons:

While the words of warning in this article may be true, they (sadly) sound
like a thinly veiled complaint about competition increasing pressure on YC's
investment turf.

Founders should be grateful for, not skeptical of, increased funding and
competition in early rounds as it should help them raise on better terms!

~~~
tlb
There is, of course, a potential conflict of interest anytime an investor
gives advice about other investors. But not as much as you'd think, when the
investors specialize in different stages.

The rounds typically go:

    
    
      seed - angel - series A - series B - series C ...
    

YC only does seed and series B onwards, so it can give unbiased advice about
angel and series A. By the time a startup is doing series B, they should have
in-house experts.

~~~
Tomte
I've never understood these terms. Is there a clear definition for those?

Seed is very little money, angel is more money, but still small enough that a
wealthy individual can provide it?

Series A, B and C are pretty much the same, it just so happens that companies
usually re-capitalize three times before going bust or IPO?

(The whole space is very perplexing, the idea of diluting earlier investors
sounds outright fraud-like to me, but obviously it's well-accepted and
probably priced in.)

~~~
icedchai
Angels are often part of seed rounds. Differentiating between the two seems
pointless.

Also dilution is part of equity. There is nothing fraudulent about it.

~~~
soup10
unwanted dilutions, share issuance dilution scams, controlling share dilution
schemes, clawbacks... there's a lot of unpleasant things that can happen to
minority stakeholders

------
simonebrunozzi
> Founders have a right to know where the money they are taking comes from,
> and they need to know how that source might influence the advice given them
> by their investors.

That's correct. However, a provocative question: does every YC company know
where YC's funds come from? My purely anecdotal evidence is that at least
half, possibly 2/3rds of them, don't. If that's the case, it might be useful
for YC to disclose that to everybody.

------
timruffles
"LP dollars", LPs = Limited Partners = [https://www.quora.com/What-is-the-
difference-between-limited...](https://www.quora.com/What-is-the-difference-
between-limited-partners-LPs-and-general-partners-GPs-in-the-venture-capital-
business)

------
motohagiography
Is it accurate to interpret from the article that if an angel investor is in
fact backed by money from LPs, her fiduciary responsibility to her own
investors is greater than the flexibility she might have toward the company if
she were just running her own money, and therefore these incentives can put
her interests at odds with founders?

Further, is there an implication that it's the SAFE itself that sets this up
in the first place? The example I'm thinking of is an institutional LP who
can't do risky deals like startup SAFEs, but they can buy into "established,"
funds where the risk is distributed over other partners who can, and this
angel front gets them the startup portfolio exposure they need.

The downside is the SAFE explodes into giving up more equity than founders
anticipated to their proxied angel, whose partners' risk appetite causes
complexity and conflicts with potential A-round participants.

I've only read about this stuff, but what would you correct about these
interpretations?

------
tuberelay
Does anyone else think that angel investing seems like an odd concept in that
it implies a single person investing a large amount in a very early stage
business.

Most people with sub 9 figure net worth should probably steer towards
investing in larger derisked businesses as they are unlikely to back the 100+
startups required to get the 1 really big winner.

In contrast, large VCs who have the capacity to invest in several hundred
startups are much better suited to this form of investing as they can derisk
by having a large portfolio size?

------
RocketSyntax
Boston is guilty. New englanders are too practical to be angels.

~~~
icedchai
Do you have any more details? There's dozens of angel groups in the Boston
area.

------
vikramkr
One thing I don't understand - why would exceptionally high or uncapped safes
be a bad deal for founders? The post mentions that this leads to dilution and
other issues in the eventual series A, but doesn't an uncapped safe lead to
less dilution in the series A than a safe with a lower cap? Why is it a bad
thing that there are more "to good to be true" offers being made now?

------
RhysU
Based on the title, I wanted Evangelion.

------
chews
This is a bullshit article... ycominator is an “angel” who invests in
“startups” like alpaca markets, a “free” trading platform.

This “free” trading platform, isn’t a startup, it’s a front for the front
running side of the business alpaca.ai, yes the users in this YC backed front,
are just the inputs to a more elaborate Japanese trading firm that front runs
US markets.

You guys are Hippocrates.

~~~
tlb
Y Combinator is a seed accelerator, not an angel investor. They're quite
distinct types of investors.

Your point about Alpaca is unclear to me. If you want to convince anyone,
perhaps you should write a blog post, with sources and evidence, to explain
why you think it's not a startup?

~~~
chews
Open tab to alpaca.markets Then Open tab to alpaca.ai

Look around on both that they share founders, and that one startup is used to
power the other.

It’s like Robin Hood but sneakier. P.s. I work in the regulated finance space,
finra compliance is my life now.

Edit: “PFOF” as it’s called :-(
[https://files.alpaca.markets/disclosures/library/Alpaca+PFOF...](https://files.alpaca.markets/disclosures/library/Alpaca+PFOF+Disclosure.pdf)

