More Bad Angel Behavior

I’ve written about this before (see “Beware of ‘Angels’ with Sticky Fingers“) but I just had a fresh run-in with this class of investor and wanted to share the (anonymized) story in case others find themselves in a similar situation.

The new twist on the story looks like this:

  • An “influential” angel writes a small check in a new company’s seed round
  • Like any good investor, that angel does what he or she can to help the business succeed — making intros, giving advice and generally being supportive of the founders as they do the incredibly hard work of building a business from scratch
So far, so good…
  • Now it’s fundraising time, and this angel — like all the other early investors — helps out with intros to potential investors
Again, so far so good… but then comes the nasty part…
  • As new investors begin to lean in, this early investor makes a private demand to the CEO for a substantial equity grant (one or more full points pre-financing) for their “invaluable assistance”
  • The punchline to this demand is a not-so-veiled threat to stop doing what every other investor has been doing as a matter of course to support their investment — putting their time, relationships and reputation behind the business they invested in — if this demand isn’t met.
Companies are at their most vulnerable just before a new financing, when cash is short and all hands are required on deck to get the next round closed. Using this moment as a leverage point to extract value from highly stressed founders who are giving their all is an egregious violation of investor trust and ethics.
So founders, be careful out there — check your investors’ references as carefully as they check yours, and don’t assume that just because someone is rich and successful that they’ll deal fairly with you when the chips are down (maybe that’s how they got that way in the first place, and maybe not).