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July 14, 2007


Outstanding, Rick!! I am an angel investor myself, and part of three angel groups. You are right, angel capital is critical to the startup ecosystem.

Angels invest seed stage money when no one else will. They take enormous risks, and work hard to help these small companies get to the next level.

In my day job at Microsoft I work with VCs every day. Most of them are seasoned professionals who understand the ecosystem.

Sometimes you run into arrogant B-School jocks who think they are experts at financial engineering. They take joy in squeezing angels and even the entrepreneur. These are the same guys who will fire a founder and put their own people in...just because they can.

Over time these guys will get squeezed themselves, and left out of good deals because of their history. The VC business is a small world built on reputation and trust.

Most VCs I know are honest, hard working, former entrepreneurs, who do this because they love building companies. Rick, you are one of those guys. Thanks for standing up for what is right, and calling these clowns out.

Don Dodge

@Rick: It seems to me that switching to warrants from a discount to the next round pricing is more about optics. The warrants will dilute and you can back into a discount from the warrants, right? Of course, there's no issuance of Pref stock, voting rights or other rights with warrants. Am I missing something else important? Would appreciate a follow up. Thanks.

Ps. And a 20% discount for taking serious risk (essentially the angels took equity not debt) is totally reasonable. I think most savvy investors would agree, especially there was a lag of at least several months between the bridge finacing and the Pref round.

Good thoughts.

Isn't the entrepreneur in this story just as responsible for renegotiating the angel's discount?

The entrepreneur could have simply walked away from the deal. Or if he had no alternatives, he could have eaten the dilution the VCs were trying to suck from the angels.

Timely post, Rick.
I've lived (and invested in) that story you heard. And, the VC's that killed the angel discount in the first round of an Atlanta company eventually killed the company because they all fought with one another for years. C'est la vie--another good lesson learned.
Angels take the real risk with the "real money"--their own cash. I won't get into where the VC's money mentioned above really comes from.
Angels are here to stay--and they have loooonnnngggg memories......

no city needs angels more than our fair city of Toronto :)

good on you

what parameters would you use to price the warrant? term? keeping in mind that your angels have to feel good about those parameters...

Excellent post Rick. Angels and Entrepreneurs fuel our economy. For a VC, relationships with entrepreneurs and angels are fundamental to their long term success. An angel or an entrepreneur that had a good experience with a VC will return to work with them. No question asked.

As for investment structure, I believe that mis-alignment of incentives is an important reason why companies get into trouble. Convertible debts have the angel investor pushing for a lower valuation on a Series A, while the Entrepreneur is fighting for a higher valuation.

That's why I recommend avoiding debt instruments as much as possible. Even at the angel round, go straight up with equity. Why not - the number one counter argument to going with debts and warrants is that it is too early to set a value on the company. But, we all know that pre-money valuations for a Series A are pretty standard - depending on the type of business. Why not argue it out right from the get go. Then, once everyone is in the boat, the only objective is to increase valuation.

Don't get me started on ratchets - avoid like the plague.

Rule of thumb, keep you cap structure clean and you will have less problems aligning investors through the growth of you company.


Great post, and a timely one from my perspective, as well. A company that I had been an early investor in was recently acquired, and it ended up being a significantly more lucrative deal for the VCs than many of the angels. That isn't really the issue, though. There is no doubt that the VCs were legally entitled to what they got, and as Knox says above, I'll file it under lessons learned. What was galling was the attitude of some of the VCs that the angels should be happy to get anything.

Granted, angels may not always be as savvy as VCs, and they don't invest as much money. However, it is their money that they invest, and it is their money that gets these companies to the point where VCs can invest. I would even argue that some angels can provide some of the same "value add" that VCs often tout. Just a bit more respect would go a long way and, I would argue, improve things for everyone in the long run.

And angels have a reach into the fractals that VC's can miss. has no mahalo from the VC world, but remember angels often get first insight into the new. In 2001 I cofounded a top ten women's website. Before starting we met with VC's who told us to forget about profit, and that subscription would never work. A year later they wanted to know, are you profitable and do you have subscription. A few years ago VC's thought human search was dead with Yahoo. Next it was about user generated content, now its PPIV (Professionally Produced Internet Video). Hopefully new angel models will emerge. I think there is much potential in very small angel networks of 3 to 10 angels with diverse background.

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