Ask HN: Should I give my early angels extra equity?
20 comments
(I'm an early-stage angel, fwiw)
Quick counterpoint to the other advice telling you to give more equity out:
1) Your new investors might feel a bit slighted by this; especially if this additional equity is dilutive, which it probably is.
2) A good angel should understand that raising the additional money is in their best interest and will maximize the value of their equity if it helps the company succeed. I'm not sure what situation you're in; but if not being able to raise the extra capital would be a significant risk; then it's a no-brainer.
I would recommend against giving out additional equity. The beauty of convertible debt or safes is that you can take capital whenever you need it without affecting the cap table and it all gets resolved at your first equity round.
Quick counterpoint to the other advice telling you to give more equity out:
1) Your new investors might feel a bit slighted by this; especially if this additional equity is dilutive, which it probably is.
2) A good angel should understand that raising the additional money is in their best interest and will maximize the value of their equity if it helps the company succeed. I'm not sure what situation you're in; but if not being able to raise the extra capital would be a significant risk; then it's a no-brainer.
I would recommend against giving out additional equity. The beauty of convertible debt or safes is that you can take capital whenever you need it without affecting the cap table and it all gets resolved at your first equity round.
Nothing. Tell them they can put in the extra 150K themselves if they want to keep the others out. They should have 1st rights if they did it correctly.
this. do not complicate your cap table early with so little capital raised, think long-term. raise the 150K from value-add angels, emphasize "making the pie bigger" to existing investors. Startups and startup investing is unusually binary in outcome: you should focus on increasing your odds of success rather than maximizing value in case of success.
If the new investors only got a tiny percentage, would the angels have given you some equity back?
The earlier the investor, the more risk they took on. The same terms, if material progress has been made, doesn't seem like the same risk for the same reward.
What is right, and what you can get away with, aren't the same thing. You need more money, a first option to the original investors makes sense, unless the new investors are strategic. In that case, the current investors should understand that value and you can use that to justify the same terms (lower discount for the money, but additional discount for the strategic value).
Any restructuring should be as transparent as possible and you should spend as much time as necessary explaining your rationale to the parties involved. They don't have to like it, but they deserve to know what's going on.
What is right, and what you can get away with, aren't the same thing. You need more money, a first option to the original investors makes sense, unless the new investors are strategic. In that case, the current investors should understand that value and you can use that to justify the same terms (lower discount for the money, but additional discount for the strategic value).
Any restructuring should be as transparent as possible and you should spend as much time as necessary explaining your rationale to the parties involved. They don't have to like it, but they deserve to know what's going on.
A deal is a deal. My concern would be showing weakness, and thereby inviting all your investors to walk all over you. What happens in the next round? All your current guys start whining. A deal is a deal. Don't willingly spill your blood in shark infested waters.
I've seen @joshu occasionally answer questions like this on twitter, so it may be worth pinging him for an uninterested angel's perspective.
From my pov, it sounds to me like the early angel is basically whining. Personally, I'd offer to let him or her buy up and preserve a pro-rata. My decision would depend on if this is an experienced angel with a good rep, or someone who isn't particularly experienced / not used to how investments go and the idea that you can lose. ie if you didn't raise that $150k, this angel's investment would be worth $0 so that's it's own reward.
From my pov, it sounds to me like the early angel is basically whining. Personally, I'd offer to let him or her buy up and preserve a pro-rata. My decision would depend on if this is an experienced angel with a good rep, or someone who isn't particularly experienced / not used to how investments go and the idea that you can lose. ie if you didn't raise that $150k, this angel's investment would be worth $0 so that's it's own reward.
I think increasing their equity, even if only a small amount, is a gesture that will garner goodwill with your early investors. Cultivating an attitude of "we are in this together" cannot be a bad move for any startup.
All in it together?
OP, how many hours a week do the angel investors work on the startup?
OP, how many hours a week do the angel investors work on the startup?
$75,000/each?
Hours?
Pretty sure the investors are already motivated in the OP's success. Unless they don't like money.
They sound like professional investors. You shouldn't give them free shit.
Pretty sure the investors are already motivated in the OP's success. Unless they don't like money.
They sound like professional investors. You shouldn't give them free shit.
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Based on what? The 1st investor should know better. They should say, "we believe in you, and we want to offer the additional funding." This is not a game. If OP has something that investors are interested in then they should be able to raise cash for the good of all shareholders. The OP should go to the original investor and offer them the first right of refusal. This is a business. The angel should say, "cool here is the 150K" if they believe in the company. This is either a new angel that has have never done this before or an angle that is trying to take advantage of a new founder. The right thing for the OP to do is to tell the investors they need addtional funding and ask if they want to particpate.
For what it is worth I have invested in angel rounds, arranged for a startup to receive angel rounds, done a few startups and have held board seats. Also to the OP - warrants with a note is something to look at.
For what it is worth I have invested in angel rounds, arranged for a startup to receive angel rounds, done a few startups and have held board seats. Also to the OP - warrants with a note is something to look at.
Nobody is implying dealing with investors is a game. Communication is key. I guess I assumed the OP did communicate with the original investors. My mistake with that assumption.
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Let me clarify, I am not suggesting that you simply give someone stock because they grumbled or feels slighted because 2nd round angels received more value for their investment. Maybe the 2nd round investors were simply better negotiators. There are a number of reasons that giving more stock was necessary. I am suggesting that maybe the first angels have abilities etc that could have helped to hold costs down etc. requiring the necessity to raise a smaller amount which would ultimately minimize their stock further diluting. This in effect results in greater stock value than if you would just take the total amount of money from additional angels.
Angels I have worked with have always been great and would not expect a "gift" of additional stock. That being said, if an angel had skills, products, or services that I otherwise would have paid more for, I worked with them to supply what was needed for far less $ and future stock options.
Experienced Angels realize that raising more money is often necessary and if additional money is not raised their risk on their investment increases exponentially. Further, most would have first right to increase their investment so they can invest and prevent their dilution as well.
Communication is the key and I was fortunate to work with good angels. I had their back and they had mine, hence we were in it together. They never expected to be given anything but because we communicated their skills and networks became readily accessible.
Angels I have worked with have always been great and would not expect a "gift" of additional stock. That being said, if an angel had skills, products, or services that I otherwise would have paid more for, I worked with them to supply what was needed for far less $ and future stock options.
Experienced Angels realize that raising more money is often necessary and if additional money is not raised their risk on their investment increases exponentially. Further, most would have first right to increase their investment so they can invest and prevent their dilution as well.
Communication is the key and I was fortunate to work with good angels. I had their back and they had mine, hence we were in it together. They never expected to be given anything but because we communicated their skills and networks became readily accessible.
Is the complaining investor new or old? I would think obviously old but your description makes it seem like it's one of the new ones.
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Yep, it's smart and it's the right thing to do.
One of our investors told me that it was a bit disappointing that the early investors would get the same terms as those just joining now.
Putting aside the fact that the earlier investors did not raise any complaints at the idea of a second close when we got them in last year, I tend to agree with this investor, and would like to keep my current investors incentivized going forward.
I was thinking of issuing them options, perhaps structured so to give them an additional 20% (just mirroring the traditional discount structure in a convertible note).
What should I do?