The 'malicious' bits are typically covered by good shareholder agreements, the ones with teeth in them. Angel investors that intend to 'do tricks' tend to bail out when they come across terms like that so a good shareholder agreement not only serves you well for the shareholders themselves but can also serve as a filter for prospective shareholders. Of course the more angel investors you have the bigger the chances that you draw someone who does not have your interests at heart. So you will still need to vet them, the easiest way is to contact founders of other companies they've invested in. With a lot of first time angels flooding the scene this is of course not always possible.
A good way to deal with having a lot of angel investors is to create a separate 'angels' vehicle where angels participate, this vehicle then participates in your company.
That way you have all of the benefits and none of the drawbacks of having a lot of smaller early stage investors. You can roll your 'friends and family' round if you have one in there too.
Edit: Ah, the author mentions the 'roll-up' vehicle at the end of the article. Good.
Or worse: to find out that you have someone on board that causes other investors who do their homework to pass on your investment. Not all potential angel investors got their money in a legal/ethical way. So you definitely want to know who you are taking on board.
+1 on getting a good shareholders agreement from the start, even without investors. It’s good practice in case there are issues between the founders.
However, in regards to angels, the shareholders agreement won’t work if they invested money through a convertible note. At least before converting, during which time they are creditors of the company and not shareholders, which actually gives them some additional leverage. Hence, I recommend using something like a SAFE if needed, instead of a convertible note.
Well, if you have too many, you've done an unregistered securities offering and the SEC will come after you. At 35 investors, the rules change. Read up on Regulation D.
Oh boy. It really does. If, for example, you've got a pile of non-accredited on your cap-table and then go to the next round, those bigger dogs may (read: likely) won't want the smaller players around. So, they get an exit but your raise is not as large cause some of the money goes to them not your company. Lots of variables in there but "zero bearing" is not correct.
You are conflating small-time investors with non-accredited investors. Yes you will have trouble if you started a company by borrowing a hundred bucks each from all your friends, extended family and random bystanders, but for almost all startups there are exactly zero non-accredited investors on any cap table. Most investors are accredited without even realizing it.
for almost all startups there are exactly zero non-accredited investors on any cap table
Why is it unfathomable to imagine someone with a $500K NW writing a $5k-20k cheque?
To be accredited you either need $1M NW or sustained $200K income (2+ years). Leaves plenty of room for small-time angels who want to invest 1-4% of their net wroth
It isn't unfathomable, just extremely rare. There simply aren't a lot of people with <$200K/yr total comp who are investing in random pre-seed startups, and even if they exist very few companies will actually take their money.
This thread is kind of factually wrong post-JOBS Act anyway. You can accept lots of unaccredited investors under Regulation CF, and you can become accredited by taking an exam without meeting the income requirements.
Regulation CF [1] is a kind of mini-IPO. You have to work through a funding platform/broker, file with the SEC, confirm the net worth of investors, and such.
The most active funding platform for this is Wefunder.[2] This is sort of like Kickstarter, but with equity.
The investors self-affirm their net worth through their broker.
There were some other rules changes this year that make it easier, though I can't find documentation of what they are atm. I've noticed more use of SPVs which simplifies things for the company.
The main problem with this is it's a bad idea for most investors because the investment opportunities are largely bad and take 6+ years to get any return.
It's not anecdotal, even if you have a different experience.
People putting out $50K cheques in 'very risky' things for strangers businesses very much likely to fit the criteria for accredited.
Maybe your 'Uncle' might do this, but it's generally not a concern that you're going to have that many of them that it's going to force you to go public. Also, you can vet for it by asking the question.
I'm not conflating. I'm sure of the realities of deals I've observed/participated in.
My point about "zero bearing" stands. I'll repeat the concept differently: be careful if you have any non-accredited investors on your cap-table; there is a greater-than-zero chance it can affect the next deal(s).
Part of the reason is that having even a single non-accredited investor will require the company to collect and make available a significant amount of financial information -- defeating the whole point of the private placement which is to avoid all that paperwork.
This isn't really true under the friends and family exception. I'd consult counsel if you're unsure who it's okay to take funds from and with what restrictions.
Well, presumably angel investors are accredited. If they don't have at least a million in net worth, what does that say about their track record? And if that's what it says about their track record... what does that say about your company? ;^)
This all needs the context that it is US specific. Other countries usually do not have this 'accredited investor' limitation, nor do they have low limits on how many named investors can participate in any one undertaking.
Most major countries restrict public equity offerings in some way. Many have an equivalent of a "qualified investor". Here's a partial worldwide list.[1]
Islamic banking goes in the other direction, though. In the US, anybody can loan money to anybody. Islam prohibits interest. "Loans" in Islamic banking are more like preferred stock, or a setup where the principal is loaned but anything beyond that is more like an equity stake.
This does come up in "friends and family" rounds though. It's relatively easy in a tech-dense city to find 35 friends and former coworkers willing to invest $15k, but I wouldn't expect that all of them have accumulated $1mm yet (especially in a high-tax locale, if your coworkers are late-20s/early-30s).
1) Increasing the number of investors, increases a CEO’s effort required to maintain the same quality of investor relationships.
2) An investor doesn’t need to be malicious to be a major problem. Misunderstandings, misinformation, and disagreements are more likely with larger groups of investors. One disgruntled investor in a shareholder meeting can do great damage to perceptions, which can harm your chances of reinvestment from the other investors.
3) If you want to remain a private company, you must keep the number of investors below 2000.
The article skips over the obvious point that each investor = an additional chunk of your company you have given away. Cash from 40+ different individuals might be essential to get your company off the ground, but realistically it probably isn't.
In the current environment there is an unlimited number of investors with large pockets and a tiny population of capable founders. Use that to your advantage as much as you can.
You have not 'given away' a chunk of your company. What you will have is starting capital and that can be the difference between getting off the ground or not starting at all. Capital is the lifeblood of early stage start-ups, you either need a revenue stream, your own capital or you will need investors. There aren't that many alternatives.
If you are happy with slower growth, then of course you don't need to get outside investment.
The other framing of the problem is: If you're going to raise a fixed amount of $X, is it better to raise it from a large number of angels (each writing smaller checks), or a small number of firms (each writing larger checks)?
I'd go for "larger number of participants," for the reasons I mentioned.
Sure, but that is unrealistic. If I get an angel investor who then says "hey my buddy wants to get in as well", they aren't going to agree to split their own share by half.
IMO, the author has a valuable insight, but a sub-optimal solution.
The valuable insight is that, invariably, there are domain experts whose help can completely transform your business. As a result, it's worth investing time/resources to find and incentivize them to help you.
However, these experts may or may not be angel investors. If you narrow your search to only angel investors, you'll more often than not miss out.
Conflating the goal of locating expert counsel with the goal of raising money is more often than not going to waste of your time. Raising money is a long, distracting process, as-is. Just get it done as quickly as possible on fair terms with a trustworthy party.
Nice try angel investors. On a more serious note, investors need more companies to invest in. What does this post spread but propaganda? Why exactly should we take more money early when the real question is efficacy and speed of growth? Throwing more money at this issue likely won't fix it, so a headline like this is misleading. Less angel investors is better, and it's better to be picky about them and get better terms if possible. The opposite of this article.
You think you are going to get better terms as a founder by being pickier about which angels you let in?
You do understand that most angels invest in a company because their friend did. If you keep rejecting angels you aren’t going to get good terms because you’ll have nobody interested in your deal.
Just closed a pre-seed and my angels all used the RUV, with one exception.
Overall, would _definitely_ use again as a founder. It's incredibly simple and it costs us ~$8K. To the angels, no cost no carry, so it's v similar to investing directly.
Also _should_ simplify our life with lawyers in a series A.
I've been on the receiving end of one three times now, but have never "hosted" one myself. As an angel, I'd probably always prefer to invest directly, but if my alternative were "RUV or you can't invest," I wouldn't object to the RUV.
The process itself is slightly easier because I don't have to tediously type in wire instructions into my bank's website :)
The creator of the RUV can decide whether the company pays the fees or whether the investors pay the fees. The ones I've done so far have been "company pays the fee," in part I think to help avoid the perception that you're getting a worse deal via the RUV.
As a founder I would be quite weary of an entity such as Angelists running the roll-up vehicle, I'd rather have a small committee of trusted angel investors (usually the larger ones) do this instead of some commercial entity.
That's not a nice thing to say, it doesn't come across like that at all. Just like not every article mentioning Docker is 'a puff piece to sell Docker'. Roll-up vehicles are simply tools available to companies seeking investors.
Any tips on finding angel investors in the Midwest? Unless you're manufacturing, agriculture, or research no one wants to invest. My contact info is mike<at>candid.dev.
Better to just do a road-show in California or somewhere you can find better angels. If they are sparse where you are, your terms are going to suck and your chances of drawing bad investors goes way up.
twitter is flooded with angels, and any regular person who worked in usa big tech for 10+ years is an angel (they just won't tell you that unless they like your company)
Well you now have 44 people looking over your shoulder, giving you advice based on half-baked opinions formed on partial information, and freaking out whenever you do something that slightly surprizes them. congrats.
That's complete nonsense. A good angel-company relationship is not driven by the angels but by the company management. It's on their terms that advice is sought, evaluated, and quite possibly rejected. If you let your angel investors drive your company you are doing it dreadfully wrong.
As a participant in well over 20 investments now I've yet to see this go wrong even once.
And what happens when an investor and your cofounder disagree? What happens when they turn one founder against the other? what happens when they pressure the board?
If you haven't seen one of the above than I doubt you've been involved in more than a couple investments, let alone 20.
A good way to deal with having a lot of angel investors is to create a separate 'angels' vehicle where angels participate, this vehicle then participates in your company.
That way you have all of the benefits and none of the drawbacks of having a lot of smaller early stage investors. You can roll your 'friends and family' round if you have one in there too.
Edit: Ah, the author mentions the 'roll-up' vehicle at the end of the article. Good.