A post in TechCrunch this weekend, Manage your angel investors, or they’ll manage you, touches on an important topic for startup founders which is often overlooked. Since the actual examples and concrete advice provided in the article are a bit limited, I’m taking the liberty to expand on some of them.
I have invested occasionally as an angel and much more commonly on behalf of a VC fund in several startups at the Series A or B stage that had previously raised money from angel investors.
Building on the aforementioned article, here are a few anecdotal observations I’m happy to share in the spirit that they may eventually prove beneficial to startup founders who have raised or are contemplating raising funds from angels.
Generally speaking, I tend to favor a diverse group of angel investors in a company. The benefits can often outweigh the drawbacks, provided that the drawbacks are sufficiently mitigated in advance.
The drawbacks of too many angel investors in a start up tend to revolve around issues of management bandwidth, strategic de-focusing, and the hindrance on future financial transactions with institutional investors or even acquirers.
On the issue of management bandwidth, I’ve witnessed numerous founders sacrifice a significant chunk of their precious time performing an investor relations function for their broad group of angels. My advice to these founders is to develop a habit of providing a periodic business update, ideally a monthly email, which is shared with all investors equally. The monthly update need not be highly polished, but sticking to the monthly schedule is imperative. If a monthly basis is too unwieldy, then a quarterly basis should be an absolute minimum. Missing an update sends a negative signal to investors and generates unnecessary cause for alarm and time-consuming noise. For more in-depth discussions, I recommend that founders require their group of angels to nominate a representative who can serve as the central point of communication.
Angel investors in a startup can bring valuable connections and expertise which complement the founder’s vision. The key to making this work of course is that the founder walk the delicate line of accepting and incorporating outside expertise without losing focus on the initial vision. Sometimes I suggest that the founder create an advisory board — which can be formal or informal — that includes a representative member of the angel group who serves to centralize the collective advice.
Another potential hindrance arising from too many angels manifests itself at the time of future institutional investment rounds. No matter how motivated the prospective new VC may be in doing the deal, a messy cap table can prove intractable. Even when a potential new investment favorably meets all the key criteria (vision, management team, market, product, etc.) a deal can sometimes fall apart when the mathematical parameters of it thwart the prospective new equity investment. Messy cap tables can arise when the startup layers consecutive SAFE notes (as I’ve warned here before) or from an overcrowding of shareholders with diverging voices and expectations who might complicate shareholder resolutions.
The startup founder can take some preventive steps to mitigate such issues. First, don’t issue layers of consecutive SAFE notes or convertible obligations. Read here for a detailed simulation of the pernicious the effects of that such a layering can cause.
Secondly, consider grouping the angels into a dedicated vehicle which can unify their voting rights and facilitate future decision-making. This solution is very much jurisdiction-dependent, yet every geography in which I’ve invested allows for some kind of structure to accommodate this. For example, the Netherlands offers a very commonly used structure called a stichting administratiekantoor (STAK for short; this is one of the few Dutch word which I’d like to believe I’ve sufficiently mastered in my days). The STAK structure is handy in that it can ensure that all the economic rights of an investment are properly attributed to the angel investors while siphoning off all voting rights and logistics matters to one representative voice. The representative is nominated by the STAK participants and can speak on their behalf. Other jurisdictions might not offer as convenient and well-precedented a vehicle, yet with the assistance of a creative lawyer there is likely a practical solution to be found.
The above suggestions are obviously more easily accomplished at the time of the angel investment round and not ex post. Accordingly, please consider these as preventive measures when planning your angel round. However, I understand that if this piece attracted your attention, you may be a startup founder who has already raised a significant angel around and is just now beginning to confront the complexities of it. No need to fret. There are solutions to retroactively simplify the situation. In fact I like to think that I’ve developed a bit of a specialty doing exactly this, and surely other VCs have as well. Each case is very situation-dependent though. I’ll look forward to going into the weeds on it when we discuss your Series A.
