More Bad Angel Behavior
crashdev.com
crashdev.com
Some people may disagree with that view.
Personally, I don't invest cash in start-ups at all, except for founder's stock at truly nominal prices. (I once paid $100 for 1% of a company that soon was backed by AH, Google Ventures & other name-brand VCs.) If they want my services, they can pay cash or offer attractive equity.
In another case, I asked for and received 5% of the founder stock, and was very glad I did when the CEO went for a cheap and early acquihire, with me getting ~1% of the take after retention options and participating-preferred stock.
That doesn't really imply good faith bargaining, and is really a lot closer to blackmail ("I'll make this deal tank and your company will go under unless I get 1% more")
I also don't see what's wrong with the behavior he was criticizing. It seems that the offending angel said "If you want me to do more of what I have in the past, please pay me something." If the angel did something worse than that, he wasn't clear in explaining how or why.
I agree that this kind of behavior is too obvious and not socially acceptable or common practice. But the concept of the modern style of silicon valley private equity industry (of which angels are obviously within the broad ecosystem) as that operates with any substantial amount of ethics or is deserving of or even expecting trust is so far from my experiences as to be laughable. They just are very loathe to be as obvious, or apply pressure without sufficient supporting influence.
If you've been sitting at the poker table for 30 minutes and you can't tell who the sucker is, it's you.
It is just another form of re-trading a deal.
Is that really uncommon when you get to the professionals? I've never had to deal with this myself but I am told that it happens all the time. You think you have a deal and then you get a last minute call that says we can't do that evaluation or we want some extra warrants. The rule I have always heard is "you don't have a deal until the check clears".
When it does happen, more often than not (at least, in most cases I'm familiar with) it was to compensate for things disclosed just prior to doing a deal. If such a disclosure does not scuttle the deal entirely the least you should count on is an adjustment. That's why you make sure there is a high level of transparency by the time a terms sheet is signed, you're in for a rough ride if you have not been up-front about any lingering issues.
I would throw him a bone by creating an option for seed investors to cash out in future rounds of funding, or create some sort of compensation plan if his concern is about his time commitment. Otherwise, suck on it. If he doesn't like the risks associated with startup finance, he can put his money in an index fund and go play shuffleboard.
I think the appropriate response is to thank the angel and be appreciative of their contributions but explain that there is no more equity to give.
I think it would be more accurate to write "Companies are at their most vulnerable when cash is short and they're not generating enough of it to support their operations and growth."
When you play Build A Business With Someone Else's Money and your execution (or lack thereof) leaves you in position where you need more money from Someone Else, you can lament the fact that Someone Else has significantly more leverage than you or you can acknowledge that this was a possible outcome of the risk you decided to take.
Example: Say Amazon was bootstrapped. They couldn't have run profit-free for years like they did. The result of bootstrapping Amazon? Higher prices. Slow hiring. No marketing. Little-to-no cash for R&D. Maybe company-death because they couldn't afford to wait for the market to catch up with their vision. Or maybe a faster-moving competitor now has room to move in and take the leadership role.
Do you think Amazon made the wrong choice to raise money, assuming Bezos' wish was a combination of impact-on-the-world and wealth?
As for bootstrapping: sadly, lots of young and inexperienced entrepreneurs underestimate how much money they'll need to execute. That's not a control issue; that's a starting-a-business-when-you-have-no-business-starting-a-business issue.
Finally, the word "big" is too subjective to have any real meaning here. If you told a group of first-time entrepreneurs that they could own 100% of a highly-profitable multi-million dollar a year business, most would probably tell you that's "big enough." And even though many of them fly under the radar, there are a countless number of those businesses in and out of the tech world.
(I am not trying to be snarky. What's your definition of bootstrapping?)
It's not entirely clear to me how Microsoft was financed, but there was absolutely outside financing (August Capital: http://en.wikipedia.org/wiki/David_Marquardt ). Also, Bill Gates was born pretty rich. "His father was a prominent lawyer, and his mother served on the board of directors for First Interstate BancSystem and the United Way. Gates's maternal grandfather was JW Maxwell, a national bank president." (from https://en.wikipedia.org/wiki/Bill_Gates). I'd wager his folks were angel investors in one form or another.
A business needs to make money as soon as it can. It's how it survives. Facebook and Twitter are exceptions.
It's the same way that an anarchist cannot make sensible statements on tax policy. "Taxation is theft" isn't an argument for or against eliminating the mortgage interest deduction, it's just an irrelevant distraction.
It's common that deciding to reject the status quo requires strong and considered reasoning.
Many businesses require capital, and it's worth noting that equity isn't the only means by which it can be raised. This said, money isn't free (except in certain financial centers of course) and the people and institutions providing it generally aren't doing so out of the goodness of their hearts. My comment simply points that out.
Want something useful? How's this: it's easier to raise capital on reasonable/favorable terms when you don't need it. In other words, put yourself in a position where you're raising capital to grow, make bigger investments earlier, etc., not to make next month's payroll. I always figured this was common sense, but in Silicon Valley, more than a few people seem to believe that the way to build a business is to return to the funding trough every time you've exhausted your last round of funding.
The angel paid for his shares with cash. If he's also working for the business -- and driving significant value, it sounds like -- he has a right to ask for compensation for his work. And the founders have a right to say no.
Now if he's threatening to torpedo the current deal, that's just childish and stupid.