Angels in the Outfield -Disguised as Grandma

Mark McQueen, over at Wellington, dropped me a line, asking some interview style questions.  In them, I talked about friends and family, angels, etc.

I was trying to make two points.

1. Friends and Family expectations should be kept really low.

2. We need more Angels in Canada.

Matt Roberts saw it and wrote a blog entitled "Today's friends & family are Tomorrow's Angels."  You can read the full post here.

The chunk of interest to me is:

"But I’ve got a bit of the opposite view on the rest of his view - friends and family rounds - in most startups I know of are the original angels. They’re usually the ones who get the first $300-600K done, not by themselves but by opening up their contact list to the entrepreneurs and introducing their usually wealthier friends or contacts. They wouldn’t flog the deal to their contacts if they didn’t consider it an investment. Never mind what Rick (or I) might believe, to them its an investment.

Ricks comments also leads into the usual complaint I hear about VC’s, in that they (we) have no respect for the angel/friends/family investors. I hear this all the time. Its a concerning trend that all Canadian angels seems to share this view, especially after years of limited liquidity events."

Ahhh, no.

With respect, Matt, this is not at all where my thinking would be heading.

Over the last, call it, 200 new/start-up/seed type deals I have looked at, most of them start out with credit cards, second mortgages, money from Mom/Dad/Uncle Ned, etc. That is before the lawyer calls in the 'friends' as does the account, the doctor, etc.  My focus with the comments to Mark was strictly: Uncle Ned. 

First, I totally respect Uncle Ned and anyone that helps out a start up.  Mazel Tov.  Set your expectations low as you are doing it as a family member first.  If it is truly, no kidding, I'm serious, it is an investment; no problem, structure it that way.  Different plan.  That would lead into my rant about debt that converts into the formal raise of capital so that Uncle Ned, even tho he can't do the pro-rata thing, gets some pref shares, some shares along side of the professional (or formal) money.  That's respect and that is what I love to see coming into my front door: Debt from Uncle Ned vs. Uncle Ned's $25,000 dollars which created a post money value of the idea (!) at somewhere north of 50 million dollars.

You show me a family that passed the hat on a good deal, got a debt instrument and I'll show you a JLA term sheet that rewards those people by respecting that up front risk/faith in the form of honoring the terms of the debt and not crushing people, etc.  And, yes, to be crystal clear, I have term sheets out that put my money where my mouth/blog is.

But my original statements still hold: set expectations low so everybody can enjoy the family Thanksgiving Day turkey.

Angels got/get screwed because of bad structuring of deals.  Angels are a critically import part of the eco-system and must be rewarded for taking early risk and I've said as much for a long time.

While I appreciate Matt's view and respect the excellent work he does (queue theme from love boat),  Uncle Ned is not tomorrow's Terry Matthews or Ken Nickerson or Peter Schwartz - to name three extremely smart/successful angels-when it comes to the Angel network. 

Uncle Ned is helping out a family member and deserves respect/some reward for that effort which is accomplished expectation setting and by proper, but pesky, paperwork.

[Note to Mark Ralph. You are one of my favorites and if the Raptors go all the way, get out the checkbook, we're baack.]

Comments

[MRM]

As a rule, I've always seen the friends and family round to be akin to charity. Whether intended or not, the vast majority of private investors put their $ into a firm because of whose in charge, and not what they are actually in charge of.

This causes two problems: high pre-money valuations that must be drastically reduced (fixed) the first time an "outsider" invests; should the company be able to raise outside $ later (which is a big victory), there is a tendency to shy away from these terms sheets so as to avoid the perception of a down round. So the company goes back to the original guys and limps along for a little while longer.

This is not to say that every tech start up needs Angel or VC capital to succeed. But putative tech startup CEOs need to appreciate that Uncle Ned's $100,000 might be single largest individual investment outside of his home.

Which isn't the right risk profile to match up against a start up.

The IDA, for example, would bounce a broker for putting Uncle Ned into the same deal.

Perhaps there's a hint there.

MRM

[matt roberts]

Hey Rick,

I agree with all your comments. In my own practices I've encouraged debt and in fact the angel based financing I'm doing now I've been encouraging a debt with a conversion later. But you also have those who are a touch less happy with those structures, usually uncle ned.

I think in rereading Mark interview I got hung up on the "the expectation should be zero or a tax loss receipt" and Mark phrasing of Friends & family round as 'charity.' I'd also just come out from a meeting with a local group of Angels a few nights earlier that made me particularly raw on the matter. Their comments left me with distinct impression that they felt we treat their 'investments' with a lack of respect.

In my own opinion, in contrast to the previous 'Uncle Ned' (who is uncle ned anyways?) stories you've told We've concentrated on making the deal an easier flow for the VC coming after the friends and Family round, and that said easier for the friends and family themselves.

While not disagreeing with anything above maybe that should be the subject of a post - How to structure you friends and family round, with an eye to the next round or not. I have seen several deals die 'or languish on valuation' because of Uncle Neds investment, I remember that earlier post on the deal that died on signatures. The concept of debt or a trust seem to be lost in this equity based world.

Also - thanks for the love boat music ;)

cheers
matt