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).


      1. Jessica Darko

        Except that there’s a culture of sweeping things under the rug around startups. A lot of people don’t do it because investors are just the kind of people who will not do business with you when you act ethically.

        I saw this in seattle years ago, when a VC partner who literally destroyed a startup by forcing a terrible, stupid decision on them, had the entire “community” leaping to his offense when I pointed out that he’d done so.

        Hes still out there making a living “advising” companies.

        PS- that decision was not only bad advise for the company, but it profited the guy personally, so it was unethical.

  1. MikeEurope

    Well there is worst than that. In EU we suffer the “fake VC” syndrome. Went to a meeting with a VC. Supposed to meet a partner, met with an Associate. He listen for 1h 1/2 to us. Takes the documents. Never hear from him again only to see on Linkedin that he became friend with the team of another VC firm that has a strong position in our direct competitor.

    I am more worried about punters in the VC world than these so called angels, those are easy(er) to spot.

    Another thing to say about VC, they only know one or two vertical and more than once they know it on the surface. Next time round I will build a videogame app for babies. That might fly well.

    1. Jessica Darko

      I’m not sure that is actually worse than in the Bay Area. There are no secrets in the Valley because the VCs do not keep confidences. I’m not super well connected but within a few hours of arriving when I visit I know the state of all the hot startups, the internal scandals, etc.

      When you give info to a VC you can be assured that they will share it with any party they think is interested.

      They cannot be trusted. Of course they act as if “any VC who betrayed a confidence wouldn’t be able to do business anymore”… only that’s not the reality. They do it all the time and it never hurts them because who is going to turn down money, even from a scumbag?

      Ultimately, that shows the problem — they prey on us because there are too many willing victims.

      1. lksugarman

        The best way to avoid being preyed upon is build a *business* (and, I’m not entirely sure that all startups actually have that mindset) and be prepared to build it the old-fashioined way. If your mindset is about building something to get funded, or getting to a point of financial desperation, then you’re vulnerable. If you build to build a business, that should mean you’re generating revenue, that you add personnel as needed and as you can afford, and you will always be in a strong position to pick and choose with whom you want to get in the investment bed.

        Bottom line – Don’t set yourself up to be a victim!

  2. Adam N

    I’m glad you point this out. More mature startup people will delicately say “that’s not appropriate unless we do the same for all the early investors” at which point the angel will understand that it’s not a tenable position and drop the subject.

  3. Jessica Darko

    I’ve seen VCs do the equivalent of this (and really much worse) many times. In fact, this is the modus operandi of VCs in my experience, if they have enough control to put you over a barrel until they get extraordinary terms in their favor. One variation of this is, when the VC is responsible for a large portion of the round, to drag out closing of the round for months and months until the company is nearly out of money. Of course they are happy to offer “bridge” loans to “help” the company, but of the terms are terrible for the loan.

    Ultimately, for software startups, we should just start skipping outside investment completely. It’s easy as an engineer to make enough money to live on for 6-12 months, and if you haven’t got a significant revenue stream by the end of 12 months (2-3 pivots equivalent) then you’ll at least have given it your all.

    That’s much better than a tiny startup of 2-3 people giving 1-2 *man years* their first year just to looking for money.

    Which brings up the real way that outside investors– even the good and well meaning ones– screw over startups: They take way too long to decide, and the entire fundraising process is a huge distraction from the company at a time when all hands need to be on the product.

    This points to one good thing about accelerators — spend 6 months getting things going, give your demo day pitch and if you haven’t closed a round in 30 days after the pitch, move on. (and stop looking for money). At least that way you have a chance of a quick outside round, and if it doesn’t happen, shut down or rely on the revenue you generated during the accelerator (of course these days too many accelerators are cargo-cult schemes that indoctrinate founders with bad ideas like that making money is useless, and that they should spend more time and energy on their demo day pitch (and generating fake metrics for it) than on making their product great.)

    Fundamentally, the startup world, when it comes to outside investment is pretty broken and needs to be reformed. If it doesn’t happen soon, more and more startups will simply start skipping accelerators, angels and VCs completely.

  4. el_tigger

    I don’t know the particular situation, but the investor might be doing exactly the right thing in his perspective, and maybe even the best thing for you. One example situation would be where this influential investor has a stake in your company which does not amount to a big enough weight in his portfolio to justify his time investment. Unless he is given more equity, he would have to reduce his effort.

    It looks like extortion, but it might very well be a win-win situation. If on the other hand he does that at every startup and at every seed round…

    1. lksugarman

      It’s extortion, plain and simple. He’s changing the rules in the middle of the game at the most critical point, instead of being clear about the exact terms of his investment upfront. And, yes, if the startup doesn’t bring up this point, then the more experienced investor has an obligation, as part of the advice s/he’s providing, to be very clear about how much time, etc. s/he can provide for the investment s/he’s making. #don’tbeanassholerule

  5. Ger Kelly

    I guess if you find yourself in this predicament all you can down is remember it after you raise your next round (ie. try to get rid/dilute of said investor ASAP).

    I’m actually working on a tech startup simulator where one aspect is handling investors and equity giveaways. If you want to know more head over to

  6. worldwidelexicon

    This is why the JOBS act is going to leave a lot of these people in the dust. I’ve founded four companies in the past 15 years. They were all bootstrapped with minimal outside funding (angels, no VC). I never felt comfortable talking to VCs due to the “insider baseball” aspect of the valley.

    The new SEC rules will make it possible for early stage companies to raise the equivalent of a small A round. For example, if you have a small but growing user base, you should be able to raise a decent amount of money by offering a combination of perks and equity to early adopters who kick in $100 apiece. Kickstarter has proven the concept.

    I am planning to do exactly this with my current project. I’d rather spend my time building the product and customer base than taking meetings with people who will slide all the information I give them under the table to their buddies. Yes, there are ethical people in the business. I know who they are and will talk to them, but won’t be shopping around generally.

  7. jdd6y

    There are some potential legal issues in behaving in this way. If they are asking for points for securing additional financing then they are acting like a broker and need to be registered. There could be a breach of fiduciary duty as well, depending on the facts. If it is only a passive shareholder, no board seat, no promises made, wanting equity for past services or future services then one can just say no. If they are a board member then leveraging the corporation for person gain seems to me to come very close to a violation of the duties of good faith/loyalty. If the investor interferes with fundraising from others then it is also unlawful. And, if it is a threat then it is extortion. All that said, this is not something that people who have sufficient business experience would be surprised with. Caveat emptor.

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