[HN Gopher] Why I stopped angel investing after 15 years (and wh...
___________________________________________________________________
Why I stopped angel investing after 15 years (and what I'm doing
instead)
Author : mooreds
Score : 137 points
Date : 2025-05-03 13:22 UTC (9 hours ago)
(HTM) web link (halletecco.substack.com)
(TXT) w3m dump (halletecco.substack.com)
| tananaev wrote:
| I think there's just too much money chasing too few good
| businesses. Early days of tech boom with lots of opportunities is
| over. Any promising startups nowadays get crazy valuation very
| quickly, so stop making financial sense to invest in.
| georgeburdell wrote:
| If it's a bad time to invest, would it be a good time to be on
| the other side of the table?
| propter_hoc wrote:
| With much love for my angel investors, angel investing is
| absolutely a mug's game.
|
| If the company doesn't get off the ground (vast majority of
| investments) you lose all your money.
|
| If the company does get off the ground, you are the lowest on the
| pref stack, and you have no ability to follow on to protect your
| position. You're not a contributing employee or meaningful future
| source of capital so your piece of the pie is just dead weight on
| the cap table. This means every single subsequent investor (and
| the founders, if they care more about money than their
| relationship with you) has an incentive to cram you down.
|
| So net net the chances of success from passive angel investing
| are only slightly better than playing the lottery.
|
| Best approach would be to make very few investments, where you're
| able to build a special relationship with the founder, and
| ideally get a board seat to defend your stake.
|
| ===
|
| Edit - to be clear, I don't think startups should be giving board
| seats to angel investors. It does happen in exceptional cases
| where the angel is uniquely valuable to the company, and those
| are the cases where the angel can defend themselves. But they are
| rare, which is why it's mainly a bad game to play.
| bilsbie wrote:
| Is it not reasonable to ask for a seat in every investment?
| BlandDuck wrote:
| Too many investors, too few seats
| codezero wrote:
| Very few of the startups I've worked for have given board
| seats before Series B.
| bix6 wrote:
| A board seat? Absolutely not, you're a minor investor.
|
| A pro rata opportunity? Maybe but why wrangle 50 angels when
| you can have 2 firms cover it?
| edoceo wrote:
| You don't do 50 angels. They're in one SPV and you only
| work with the deal-lead (while getting investment from N
| investors)
| bix6 wrote:
| Hopefully but not always
| hellcow wrote:
| A general rule of thumb is that you have 3 board members at
| the seed (1 non-CEO founder, the CEO which is typically
| another founder, and the lead investor). So you have 1 seat
| available for investors, whereas you may take 5-20 checks.
| Not everyone is getting a seat.
|
| At the A you usually expand to 5, adding the lead of the A
| round and an independent board member. Beyond that, it's
| common for the earlier investors to get replaced on the board
| in future rounds and maintain observer rights.
| algo_trader wrote:
| What happens if your "lead" angels want to put money but
| not a board seat?
| bcantrill wrote:
| If you are taking truly _no_ institutional capital, it 's
| a party round -- and unless you have a repeat founder
| that knows exactly what they're doing (and often even
| then!), it's a huge red flag.
| paxys wrote:
| At best it's a stepping stone to a "real" VC job.
|
| Take a couple years to learn how the industry works, make
| connections, maybe even get lucky with some bets. Then use all
| that to either start your own fund or get a job at a big
| Silicon Valley VC firm.
| bee_rider wrote:
| > So net net the chances of success from passive angel
| investing are only slightly better than playing the lottery.
|
| Is this right? An organization running a lottery--their whole
| job is to run a lottery, they've staked their reputation on the
| fact that they pay out to winners. The one with a reputation to
| defend is the one paying out.
|
| The company angel investor is dealing with a company that,
| ultimately, wants to either get into position to sell some
| service, or wants to get bought. Their raison d'etre isn't
| being a reliable payer-out of winners. I'd expect the lottery
| to be much more honest.
| johndevor wrote:
| > Is this right?
|
| OP made an unbacked assertion and that can be ignored as
| such.
| bee_rider wrote:
| Eh, this is a site for chit-chatting, so I don't expect
| perfect proofs generally. Assertions that are backed only
| by personal experience and hard-to-verify anecdotes are
| fine IMO.
| wslh wrote:
| This, and I'd add that one underrated upside of angel investing
| (and being LP of funds) is access to real, unfiltered
| information about the startup and the market. That's often far
| more insightful than the "everyone is crushing it" narrative
| you see in the media. In the article, the author mentions that
| she found other ways to get that info.
| tinyhouse wrote:
| I'm not sure I'm following how anyone can target the angel
| investors specifically? Aren't all common share holders have
| the same fate? So if they screw the common share holders, early
| employees will get the same treatment as the angels? (dilution
| for example impacts all share holders). I understand that key
| employees can receive extra shares along the way, but most
| probably don't in their first 4 years.
| themanmaran wrote:
| Yea the founders also have majority common stock. So there's
| not a normal scenario where the founders and other investors
| get paid out in an exit, but the angels don't.
|
| The bigger fear is a non-exit scenario, where the company
| becomes profitable, possibly pays out large investors to
| maintain the relationship, and founders just take massive
| salaries. So no liquidation event that benefits angel
| investors.
| RainyDayTmrw wrote:
| The way I've heard it is that later investors collude
| (descriptive, academic term, not value judgment) with
| founders via liquidation preferences, dilution, etc., and
| effectively wipe out all common shareholders (particularly
| employees) and all earlier rounds, and then give the founders
| some additional terms to compensate them specifically. How
| exactly that works, what they're giving the founders, and how
| this isn't hugely illegal are all details that I don't
| understand. I put a top-level comment asking exactly that.
| propter_hoc wrote:
| That's exactly the approach. Seen many deals where the
| (remaining) founders get a big slice of new vesting options
| or reverse vesting shares as part of a recap or semi-
| distressed round.
|
| Nothing illegal about it when the company needs the money,
| just one investor can write the terms they want, and the
| founders are on board with the plan.
| RainyDayTmrw wrote:
| I understand that, particularly in a down round,
| investors can push to get more. What I don't understand
| is what allows founders to get a side deal. It seems like
| that would go against fiduciary duty to common
| shareholders and earlier rounds.
| propter_hoc wrote:
| It's because the investors still need the founders to run
| the business, usually.
| RainyDayTmrw wrote:
| More bluntly, why wouldn't/can't the other common
| shareholders sue?
| vkou wrote:
| Because then they'd be left with their original stake,
| but in a worthless, bankrupt company.
| newsclues wrote:
| But it sounds like the ford v dodge brothers cases that
| most abuse as an excuse for corporate profit
| maximization.
|
| A company should not work to enrich some shareholders at
| the expense of others
| alexeichemenda wrote:
| >Best approach would be to make very few investments
|
| Top VCs--who see the best deals and run deep diligence--still
| only have a 1-5% hit rate. As an angel, you don't have that
| level of access or time. Even if you get strong referrals,
| you'd need to be 10-15x better than elite VCs to pick winners
| in a small portfolio. Unless you're investing in at least 10
| companies, it's statistically a losing game.
|
| My experience: I invested in ~200 companies early stage (with
| some winners like HuggingFace, Checkr & more).
| dmos62 wrote:
| What's your biggest motivation for doing angel investing?
| iwontberude wrote:
| Developing a network of people who do favors for each other
| and learning about other people's businesses and industry.
| Angel investing usually isn't that capital intensive, so
| it's sometimes worth pursuing. I don't do it to get rich.
| code_biologist wrote:
| At my last startup, I think our board and observers liked
| hanging out more than they liked talking about the
| company. It wasn't perfect, but it's their money so I
| wasn't going to complain.
| jll29 wrote:
| "...and run deep diligence"
|
| I've not seen that much but what I've seen is "Let's ask a
| few buddies and google a bit".
|
| The takeaway that I agree with is the parent's and OP's point
| that you will need to invest in a lot of companies, perhaps
| 30-50, and you will nee to be in for the long term.
| gorgoiler wrote:
| Is it a thing for angels to exit in the early rounds?
|
| Instead of being shoved down the cap table by a giant tranche
| of series A preferred stock, might it not be appropriate to
| give the angel a payday instead?
|
| I guess some angels want to keep their fingers in the pie? And,
| more likely, it's just not a reasonable expectation to see an
| exit like that way before anyone else does?
| chii wrote:
| early exits probably won't get the type of return that an
| angel investor would be interested in monetarily, since you
| need more than fu-money to motivate them.
| DrAwdeOccarim wrote:
| Yea, I've seen cashing out the principal+next investment and
| letting the rest ride.
| Mbwagava wrote:
| Hell, investing in general is a "mug"'s game (never heard this
| phrase before) if you go by per-capita return. It's the
| exceptionsl performers that make an outsized contribution to
| revenue that floats the whole boat.
| sanderjd wrote:
| I read the point as being that angels can't really afford to
| invest broadly enough to hit those exceptional performers.
| jay_kyburz wrote:
| >Four others that raised money but with painful
| recapitalizations that effectively wiped out early
| shareholders
|
| I think its the recapitalizations that make the investments
| unfair. To buy a stake in a company then have it diluted by
| the bigger fish once a lot of the risk has been mitigated
| is BS if you ask me.
| pfannkuchen wrote:
| Isn't angel investing more about networking and feeling like
| some elder statesman than about returns? That's my impression
| anyway, as a non-angel.
| peterlada wrote:
| Way off. Angel investing is betting on people you know well
| enough.
| kcatskcolbdi wrote:
| "I stopped angel investing because I was losing too much money"
| danielmarkbruce wrote:
| 100% this. Every type of investing should be stopped and is a
| waste of time and money if you are losing.
|
| Talk to the few people who angel invested in google and
| facebook. They'll tell a different story. From their private
| jet.
| YesBox wrote:
| >Angel investors also face the longest time horizon for liquidity
| of any investor. Private equity aims for 3-5 year returns, and
| VCs typically run 7-10 year fund cycles, but angels usually wait
| 10+ years for exits. This means angels aren't just taking
| company-specific risk, but also the risk of facing more
| macroeconomic cycles.
|
| >Think about all that's happened since 2009 when I started:
| multiple presidential administrations, a global pandemic, zero
| interest rates, and now high inflation and higher interest rates.
| My investments have had to withstand all of these shifts, and
| many didn't make it through.
|
| Really interesting stuff (for me, as an outsider).
|
| Can anyone comment if VCs are looking for shorter fund cycles or
| are the macro economic shifts what's capping it at 10 years?
|
| I once read one reason why startups take so long to IPO is so
| private investments can benefit longer from the growth
| bix6 wrote:
| My LPs want liquidity now, always. 2021 was hot and it's been
| relatively quiet since. Mega funds are keeping companies
| private longer. Capital is tied up which hurts emerging
| managers trying to raise. My LPs want returns in 6 years which
| only works if everything goes perfectly which almost never
| happens; that's how long $100M+ rev takes if you triple yearly.
| IPO requires more rev than before, everything's larger.
| LunaSea wrote:
| Would smaller ventures not be an option? Say investing 500k$
| and selling for 10M roughly 5 or 6 years later?
|
| I would imagine that building these smaller companies looking
| for smaller exists would be easier and more predictable.
| bix6 wrote:
| That's not necessarily venture returns so LPs might not be
| interested. Selling secondaries is also a pain as you
| generally have to pay fees and sell at a discount.
| bcantrill wrote:
| It would be helpful to run out the math on the $500K
| investment: what's the post-money on that investment when
| it was made? How much capital did this mythical sold-
| for-$10M in 5-or-6 years company raise? (Or did it survive
| for a half decade on a total investment of $500K?) What was
| the headcount and the revenue and the burn? (And to whom
| does it sell for $10M?) Assuming that it wasn't a wipeout,
| you'll quickly find that the math doesn't... math: if you
| have somehow conjured a successful outcome in your mind,
| what you likely have is not a venture-scale business.
| bsuvc wrote:
| 6 years?
|
| As an LP, I would be _excited_ for liquidity in 10 years at
| this point.
|
| It seems like even for successful companies, there isn't a
| clear path to an exit for many of them. Add to that the
| increase in late-stage investors, and there isn't much of an
| incentive to exit.
| bix6 wrote:
| A bit hyperbolic but yeah. It also depends on the industry
| / stage. I'm always looking for creative ways to get
| liquidity out given the exit issues you mention.
| bsuvc wrote:
| I wasn't trying to be hyperbolic actually. I really would
| be happy if an exit would happen in 10 years.
|
| Thankfully, I can be patient, but I wonder sometimes if
| some of these companies will ever exit.
| bix6 wrote:
| Sorry, I meant my statement was a bit hyperbolic at 6
| years.
|
| Waiting for a few as well, good luck!
| bix6 wrote:
| SAFEs have also caused so many issues. They're often poorly
| priced and can lead to legal issues or frustrations.
| pge wrote:
| I feel like this is not talked about enough. SAFEs are not the
| trouble-free investment vehicle that many people seem to think
| they are.
| bcantrill wrote:
| Absolutely. The reality is that SAFEs are often used to price a
| company, even though the pricing conundrum is exactly what they
| are trying to solve! If you want the reveal on SAFEs, raise
| them uncapped (with a discount, of course!) and watch how many
| people tell you that they can't _possibly_ do that. (Not
| everyone, though -- deeply appreciate those investors who are
| willing to invest on uncapped discounted SAFEs!)
| bix6 wrote:
| What's your rationale for uncapped SAFEs? I don't think they
| are a good deal for investors.
| turnsout wrote:
| In a tale as old as time, the mega-rich get richer. It used to be
| that early stage VCs and angels could see tremendous upside for
| taking an early risk. It's utterly unsurprising that giant VCs
| have found a way to cram them down once the startup is successful
| and realize all the upside.
|
| Between this and giant PE coming downmarket, we should all just
| bootstrap and say "f off" to outside capital. With AI coding
| models, you don't need that money to build anyway.
| kilroy123 wrote:
| I agree. Bootstrapping is best if possible.
| fsckboy wrote:
| > _In a tale as old as time, the mega-rich get richer_
|
| no, they don't. what is mega-rich keeps price inflating, but
| who is mega-rich are always new names.
|
| if you are young, afauk Brin and Page have always been mega-
| rich, but just a little older and you remember when nobody knew
| who they were, nor had anybody heard of Zuck, or Musk, etc. and
| Jobs was a washed up has-been
| shawabawa3 wrote:
| Her follow-up with stats on her investments:
| https://substack.com/@halletecco/note/c-113855500
|
| tl;dr: returned $0.31 on every dollar invested, albeit with a
| bunch of ongoing investments that may still pay off (but are
| unlikely to get her even on the investments let alone a profit)
| bix6 wrote:
| Ouch. Wish we could see the companies list, or at least
| sectors.
| ryanmerket wrote:
| A few here: https://www.crunchbase.com/person/halle-tecco
| thom wrote:
| Do US angels get tax breaks on these investments? The floor in
| the UK is basically PS0.70 on the pound.
| yieldcrv wrote:
| yes, if you buy shares in the primary market (directly from
| the issuing company) there are tax free capital gains, up to
| a point. which can be gamed to be infinite.
|
| its called QSBS
| ryanmerket wrote:
| the blog post could have been a lot shorter: "I quit angel
| investing because I'm not very good at it."
| itbeho wrote:
| Per her linkedin: She's currently an adjunct professor at
| Columbia teaching a class on "Investing in Digital Health
| Startups".
|
| https://www.linkedin.com/in/halletecco/
| pgustafs wrote:
| it's called "angel" investing because it's only one step removed
| from charity
| rbanffy wrote:
| Can I be a demon investor? That'd be a dream job.
| n20benn wrote:
| I believe that's the sentiment the "Shark Tank" or "Dragon's
| Den" series are trying to hint at.
| linkjuice4all wrote:
| It's just called investor at that point.
| ryanmerket wrote:
| my charity donations are capped with the IRS. But my cap gains
| (and losses) live forever.
| astrange wrote:
| Almost everyone's charity donations are worth zero with the
| IRS since everyone takes the standard deduction now.
| helixfelix wrote:
| Your comment made me realize what a bubble of privilege I
| live in.
|
| I raised my eyebrow at "everyone takes" standard deduction.
| How is that possible with home prices and interest rates?
| Even a modest 300-400k house at 5-6% interest, property
| taxes, local sales tax deductions and minimum charity would
| exceed the standard deduction. Where I live good luck
| finding anything more than a condo for less than a million.
|
| Turns out 90% take standard deduction. This is another way
| to track the extreme "wealth" gap emerging. Only the
| wealthy itemize.
| yieldcrv wrote:
| Some things just need to be said
| barbazoo wrote:
| Might as well use the money to support your local shelter, less
| overhead and it actually does something good for a change.
| fsckboy wrote:
| i understand your true and noble motivation, but the law of
| incentives is an iron law, and it tells us your subsidy will
| incentivize the burgeoning industry that demands more shelters
| barbazoo wrote:
| They often enable people their way to recovery. Individuals
| are better off because of them. Do you have a source for your
| claim that more shelters cause more use of shelters which is
| what I think you're saying right?
| procaryote wrote:
| I worry about the things an investor-run shelter would try to
| make their investment profitable
| rvz wrote:
| Angel investor in the ZIRP era, quitting after a 10+ year bull
| market and never experiencing a market correction or downturn
| since 2008.
|
| Maybe this one was just unlucky, lost money on the way and moved
| on.
| aabaker99 wrote:
| > Four others that raised money but with painful
| recapitalizations that effectively wiped out early shareholders
|
| Does someone have a recommendation on reading that goes deeper on
| this point? What enables later investors to do this? What can
| early investors do to protect their investment?
| Centigonal wrote:
| There are a few different ways this can happen. It has to do
| with seniority of liquidation preferences -- basically, if you
| recap or you exit for less than your highest valuation, who
| gets paid first? This blog post is a pretty great summary of
| what can happen:
| https://heidiroizen.tumblr.com/post/118473647305/how-to-buil...
| skeeter2020 wrote:
| >> One company needs you to help close a key hire >> Another is
| raising a bridge round and wants your input on the deck >> A
| third is struggling with a co-founder conflict and needs advice
| >> An investor calls asking you to vouch for a portfolio company
| they're considering backing
|
| This is the investor's perspective, but note all of these things
| consume a HUGE amount of time & energy from the founder(s) as
| well, and do nothing towards advancing your product or company.
| Good reminder how distracting outside funding can be - and this
| is AFTER you've gotten at least an angel round!
| MaxGripe wrote:
| In my opinion, all companies that have some kind of "investor"
| always end up the same way: eventually, a paid sociopath is
| installed as CEO whose only goal is profit maximization. If the
| CEO were someone who valued noble ideals or principles above
| profit, the investors would quickly replace them with a more
| "optimal" person.
| Havoc wrote:
| >The post-ZIRP era (2023-2024) created headwinds
|
| Post ZIRP is arguable the more normal situation, in which case
| one really has to ask...was it ever real
| jmyeet wrote:
| > Private equity aims for 3-5 year returns
|
| I honestly don't understand how private equity makes money at
| all. The playbook is:
|
| 1. Borrow a ton of money and buy a company on an LBO
|
| 2. Load up the company with debt, often complicated, exploding
| debt, to repay the original loan. Possibly sell off assets like
| real estate to pay off the original loan; and
|
| 3. Here's the kicker: sell off the company for a profit.
|
| But we've seen time and time again that PE is a death sentence.
| Toys R Us, Red Lobster, numerous others. The company seemingly
| always explodes under the debt after the original snake oil
| salesman have cashed out. But my point is: who keeps falling for
| this and buying a PE hollowed out husk?
| dehrmann wrote:
| You've seen publicized examples (Toys R Us) where it played out
| like that, but that narrative doesn't generally pass the smell
| test-no counterparty would keep making bad loans. There are
| cases where companies are mismanaged, their value is as a real
| estate holding company, etc. and PE improves operations and
| creates a more investable business.
|
| The other thing is that like VC, PE has become saturated, so
| the good opportunities just aren't there anymore.
| bogtog wrote:
| I've also wondered how banks get convinced to offer companies
| the debt in these LBOs. The only explanation I see is that
| failures (Toys R Us, etc.) become well-known while successful
| LBOs and sales of companies with long-term profitability are
| quiet
| kasey_junk wrote:
| You are describing only 1 kind of private equity and only 1
| subclass of that.
|
| But there are lots of well publicized lbo success stories as
| well. Hilton, Safeway, Dell, Nabisco. The list goes on.
| mattlondon wrote:
| If at one point your shares are worth 1% of the company (the 1M
| of 100M startup example), how does that get diluted to nothing on
| acquisition? I thought the whole point of the early stage
| investments were you were the _first_ people to get the payout,
| not basically the last /never?
| ww520 wrote:
| Sold at a fire sale.
| mattlondon wrote:
| Precisely - it was sold so where did your 1% go at that sale?
| ww520 wrote:
| She got 1% of the pre-firesale valuation. Fire sale
| happened. Preferred liquidation of the later round
| investors probably took most of the sale's proceed, and she
| got nothing, along with all the founders and employees. It
| had happened to me a number of times, and I have been
| disillusioned a long time ago.
| aurareturn wrote:
| Because there are preferred shares common shares. Large VCs or
| loans will demand preferred shares. They get cashed out first
| in any exit. What's left could be nothing for common share
| holders.
|
| This has happened plenty of times where a startup in a dire
| situation had to sell itself or raise a down round with poor
| terms to survive and the earlier investors got wiped out.
| RainyDayTmrw wrote:
| For "regular" dilution, the way it works is that there's a pre-
| money and post-money valuation. If a company is worth 1M pre-
| money, and an investor puts in 1M, then the company is worth 2M
| post-money. Someone who owned 1% before (effectively 10k of the
| pre-money) now owns 0.5% (effectively 10k of the post-money).
| Ostensibly, their stake should be worth exactly the same before
| and after the deal, a smaller slice of a bigger pie. In
| practice, there's various incentives to inflate valuations,
| such that the early investor's slice is getting smaller faster
| than the pie is getting bigger.
|
| Furthermore, investors tend to demand extra terms on top. The
| big one here is called liquidation preference, which is a
| clause that says, approximately, if/when this company is sold,
| this investor gets the first X amount of it, usually
| corresponding to some multiplier of their investment amount.
| Later rounds will ask to win out in preference, effectively
| creating a stack of liquidation preferences. In practice,
| liquidation preferences can often add up to so much that a
| moderately-successful sale goes entirely to preferred
| shareholders, and common shareholders see nothing. Perhaps the
| dealmakers put in a bit of a sweetener for the founders and/or
| current executives to grease the deal. Your average employee
| and angel or seed investors certainly see nothing in this deal.
| jay_kyburz wrote:
| The problem is with the first step. If the angels owns 1%,
| and the founders own the other 99%. When taking more money,
| it should be the founders selling a portion of the 99%, not
| diluting the angles percentage.
|
| The stake should remain the same, but double in value. That's
| the risk of early investment being paid out.
|
| I'm really surprised it doesn't work that way.
| RainyDayTmrw wrote:
| The actual transaction is framed in terms of generating
| more shares in the company, such that existing shares
| represent an ever smaller piece of the total pool. What
| you're suggesting would be the founders selling a fraction
| of their shares to the new investors, while keeping total
| shares the same. Institutional investors are highly opposed
| to that, for a variety of reasons, including because they
| want founders to remain bought in to the company. (Some
| institutional investors will allow founders to "take some
| money off the table" to a small extent, but that's the
| exception and not the norm, and it's viewed as a favor to
| the founders. More cynically, institutional investors don't
| want founders to have financial independence before the
| company fully succeeds.)
| lbotos wrote:
| Those with angel experience:
|
| Do angels not get terms to "cash out" in secondaries/later
| rounds?
|
| I was under the impression that some angels effectively acted as
| bridge financing to get to later rounds (in this case A/B/C) and
| to then exit if they wanted to?
| kirubakaran wrote:
| While that can always be arranged if all the parties agree, it
| would be a bad idea for the founders to give the angels the
| option to cash out like that, as the fact that they're choosing
| to cash out will tank all further investments. VCs will wonder
| "What do they know that I don't?"
|
| Always consider signaling risk.
|
| This can be avoided by always cashing out, I guess. But it's
| bad for angels to _always_ cash out, as letting it ride on the
| unicorns is the only way to make meaningful returns, if any.
|
| Always consider power law.
| RainyDayTmrw wrote:
| I've heard variations on this sentiment repeated a lot. The exact
| message varies, but it's usually some variation of: early
| investors always lose, small investors always lose, and/or non-
| preferred shareholders always lose. I've seen and lived a small
| number of personal anecdotes that seem to back this up, and I'd
| like to better understand what underlying pathology causes this.
|
| I understand that early investors are taking the most risk, and
| clearly there's a lot of downside. But what prevents them from
| being able to realize or capture the upside?
|
| I've heard a theory, a few different times now, that bigger,
| later investors effectively collude (descriptive term, not value
| judgment) with founders to squeeze out early founders and
| employees (common shareholders) via unfair terms, such as
| excessive dilution (accepting too low a valuation for larger
| investment), excessive liquidation preferences (2x or more),
| etc., and then topping the founders up via side deals. I've heard
| that, by virtue of squeezing out passive participants, they're
| able to offer more to the founders, and that incentivizes the
| founders to take their deal over other alternatives. Does anyone
| know more specifics about how this happens? In particular, how is
| this not a breach of fiduciary duty to passive participants?
|
| It's definitely possible to write anti-dilution clauses, etc.
| But, I've heard that more or less no one writes them, and more
| importantly no one accepts them. If this is a pretty well-known
| game, why haven't countermeasures become popular?
|
| For my personal anecdote, I was once an early engineer - the
| first hire after their Series A - at a small startup that never
| found product-market fit. The economy was bad, and they were
| running out of money, and they took - as I understood it - a
| dubious Series B led by a dubious investor. The founders were
| very vague about the terms of the round. In particular, the
| founders revealed that the investors took liquidation preference,
| that it was greater than 1x, but absolutely refused to say how
| much. That always left a bad taste in my mouth. When I left, I
| didn't exercise my options. In the end, the company floundered,
| and is a zombie to this day. In that regard, I suppose that the
| particulars of that round don't really matter - none of us were
| seeing anything regardless.
|
| I'd really appreciate if anyone closer to the money part of this
| industry could weigh in.
| bayarearefugee wrote:
| > Just since 2023, I have had:
|
| > One company that raised over $100M, with my shares at one point
| valued at over $1M on paper, acquired in a fire sale that
| returned zero to early investors
|
| > Two others that were also "acquired" with some fanfare in the
| media, but returned nothing to early investors
|
| > Four companies shut down after being unable to get to
| profitability or fundraise
|
| > Four others that raised money but with painful
| recapitalizations that effectively wiped out early shareholders
|
| TL;DR - Angel investing became too much like being an early
| employee at a startup always was, except it was actual money
| being lost instead of sweat equity.
| mnoronha wrote:
| right -- much of the reasoning is also an argument against
| being an early employee. the main difference is the employee
| probably has more leverage against being diluted in later
| rounds.
| bombcar wrote:
| "Early employee" used to mean 90% of boring tech job salary +
| some gambling options.
|
| Now it's often 40% or lower of a tech salary and some
| gambling options
| asdsadasdasd123 wrote:
| > Four others that raised money but with painful
| recapitalizations that effectively wiped out early shareholders
|
| I don't get how this kind of stuff happens.
| klntsky wrote:
| A little something is better than nothing, so the board can
| dilute if a shutdown is on the horizon.
| Mbwagava wrote:
| Nb i actually really resent substack for sending me to the app.
| No; I don't want to pollute my history with this post, I just
| want to read it.
| astrange wrote:
| The app makes the experience worse because you can only have
| one article open at a time, instead of using browser tabs.
| graycat wrote:
| Try to make some sense out of the OP. Start with some examples:
|
| Google: As I recall, two guys in a garage, literally, until they
| had a good start on a good business, offered to sell out for $1
| million.
|
| Amazon: Bezos and a few programmers.
|
| FedEx: I was there early on and saw a lot of stuff about the BOD
| (board of directors), Founder-CEO, executives, General Dynamics,
| visitors from big NYC banks, funding of the airplanes, deals with
| Memphis to get space on/near the airport, the worker bees, etc.
| Was close to the _action_ , office next to the Founder--CEO F.
| Smith, reported to a Senior VP with office across the hall but
| really reported just to Smith, was close to the BOD ("you just
| keep doing what you are doing until someone tells you to stop"),
| twice in work for the BOD enabled crucial investment and
| literally saved the company, etc.
|
| Plenty of Fish: One guy, three old Dell servers, Microsoft's .NET
| with ASP.NET and ADO.NET, on-line romantic introduction site,
| sold out for $575 million.
|
| Compared with Plenty of Fish, how Google started, and the
| arithmetic in the post, a summary: For the invested money: (a)
| Too many big, powerful chiefs, and not enough working indians.
| (b) Big hats, too few cattle. Too much overhead for the work
| done, e.g., per line of code written and running.
|
| So, one approach: Start cheap, dirt cheap. Sole, solo founder.
| Only an LLC and with lawyers and accountants like, say, a grass
| mowing business -- LITERALLY. Founder lives cheap, say, in an
| area with low cost of living, in a used _manufactured house_ ,
| that is also the office, old used car. Take advantage of the
| still exploding Internet and cheap, powerful tower case computers
| (assembled from parts) for development and servers, $60/month 1
| Gbps Internet connection, etc. Find a market need can meet with
| this dirt cheap approach and can get to profitibility with
| rapidly growing revenue.
|
| So, leave out the time, cost, botheration of: Investors, lawyers,
| accountants, rented high quality offices, investor meetings,
| Board meetings, a management tree, manager meetings, reports to
| investors and the BOD, 10+ employees with all the expenses,
| legalities, lots of plane travel, employee stock plans, _vesting_
| , etc.
|
| For a while, tried to raise funding; time wasted. Lesson: In
| simple terms, most VCs won't look at a business idea or
| technology before there is rapidly growing revenue. Then nearly
| all the VC money is used for the lawyers, other overhead, etc.
|
| Comparison: (A) Dirt cheap: Invest $50-K a year. (B) Angel, VC,
| private equity approach: $10+ million a year. Big difference.
|
| Problem: Investors need the lawyers, accountants, and other
| overhead so go for approach (B) where %10- of the money goes for
| the real work of getting the business going.
|
| Back to work!
| crsv wrote:
| It's hard for me to respond to these kinds of posts with anything
| other than a dismissive sentiment along the lines of "grats on
| being rich and playing your rich people sport. I'm sorry you
| don't like your rich people sport anymore. Hope your next rich
| people sport is fun for you."
| auggierose wrote:
| You got it right, this post is directed at other rich(er)
| people.
| Archelaos wrote:
| The author seems to be unfamiliar with angelology. The image she
| uses for illustrating her article does not show an angel, but a
| statue of Nike, the Greek goddess of victory. Cf.:
| https://en.wikipedia.org/wiki/Nike_(mythology) -- Is there an
| involuntary deeper meaning in this?
| kilimounjaro wrote:
| From chatgpt: " In summary, Halle Tecco's personal portfolio
| comprises about 34 direct investments, of which 24 have at least
| one female founder (as detailed above). This means roughly 70% of
| these companies were co-founded or founded by women. Notable
| female-founded companies in her portfolio include Everly Health
| (Julia Cheek), Cityblock Health (Dr. Toyin Ajayi), Kindbody (Gina
| Bartasi), Tia (Carolyn Witte/Felicity Yost), Hued (Kimberly
| Wilson), and many others listed in the first section. Halle
| Tecco's investment focus has clearly encompassed a large number
| of startups with women on the founding team, aligning with her
| advocacy for female entrepreneurs in health tech "
|
| Call it charity or call it buying gal-pals with hubby's money but
| primarily investing based on identity seems like a bad idea
| bombcar wrote:
| If X contributions and value are undervalued by the market,
| investing where X is contributing would be a winning strategy.
|
| _If_
| swyx wrote:
| made me wonder who hubby was, so saving others the wikipedia
| search
|
| > Tecco is married to Jeff Hammerbacher, cofounder of Cloudera
|
| https://en.wikipedia.org/wiki/Halle_Tecco
| gitroom wrote:
| Oof, the amount of ways angels get squeezed out is kinda nuts,
| makes me way less excited about the whole early-stage game
| honestly - you think there's actually any way for small investors
| not to get hosed long-term or is that just the rules now?
| swyx wrote:
| > Four others that raised money but with painful
| recapitalizations that effectively wiped out early shareholders.
| That last bullet was the nail in the coffin for me. For new
| investors to come in and wipe out early investors just because
| the market was in their favor was painful. It felt like
| opportunistic resets that enriched later investors at the expense
| of early supporters (not to mention early employees).
|
| what? how does this happen exactly? i'm not aware of the normal
| mechanisms. are there not minority shareholder protections?
| rorylaitila wrote:
| I live in Delaware, a chronically bad market for angel or seed
| funding. Of the funds that existed, I always thought they took
| the wrong track of seeking real returns and requiring way too
| much business validation. It should have just stayed as a way to
| help foster the local startup community with some potential
| upside.
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