Small Investors on The Capitalization Table

When you are an angel, and the company moves on to the next level, the game changes.  The information flow and the access to the top executives of the company will not be there for you anymore.  A lot of angels don’t understand this and become meddlesome.  They become a pain in the ass investor instead of an investor that is an asset to the company.

The best way is to work with a member of the board to get information.  Better yet, if you have something to add to the company, contact the board member and let them send it to the CEO.  If the CEO wants to act on it, then they can work with you to act on it.  As an outside investor you aren’t privy to a lot of the internal strategy and working of the company like a C level executive or a board member.

You might have a good network that could be used to the advantage of the startup.  Put it into motion, but do it within the confines of the startup.  Or, if it’s that good and you can add a lot of value, you might consider working for the startup.  That can cause other difficulties but they can be managed.

If you are raising money for a company, do the diligence on your investors similar to how they do diligence on you.  See how they act when things go bad.  See if they are that investor that asks for all kinds of information as the company matures. See if they are difficult.

As a VC we try to limit the flow of information using terms in the term sheet.  A lot of the reason is we assume once it goes out in an email, it is on a billboard with people reading it everyday on the nation’s busiest highway.  That can compromise the ability of the startup to execute and we don’t want anything in the way. However, we do encourage all the startups we invest in to send a short quarterly update to all investors that helps them understand what is going on-and more importantly how they can help.  Sometimes it is a quarterly call.  This is a good business practice.

On the flip side, CEO’s of startups should instruct their board members to let all investors know where they stand with certainty.   That is practicing good ethics.  Investors have a right to know what percentage of the company they own, and where they sit in the capital stack.  In succeeding rounds of capital raises, that critical detail is often not communicated to investors.  Many angel groups don’t let their members know where they stand and investors are just forced to “trust” everyone that if there is an exit they will get paid what they are due.  Since they took the early risk on the company, they deserve that.  At each financing, it’s a good time for CEO’s to work with the new lead investor to make sure everyone is informed.

Sometimes, there are chances to get liquid as the company matures.  You don’t know what the price will be.  Don’t expect it to be the final price of the post-money round.  New capital is still taking risk and there are no slam dunks.  I have chosen to get liquid sometimes, and not chosen other times.  Whether you do or don’t depends on a lot of factors.  It’s no slam on the company if you decide to get liquid.

If you are an investor in the company and get the opportunity to buy more stock, it’s not a slam against the company if you don’t.  I have bought more stock when I can sometimes, and sometimes I haven’t.  It’s a company by company and situation by situation decision.

No matter if I am invested or not, once I invest I am in your corner.  I made a lot of angel investments from 2007-2011, and while I am a small minority of the cap table if something comes my way that I think can help the company, I pass it along to a board member to let them decide what to do with it.  As my friend George Havlicek says, “We didn’t come to paint”.  We invested to win.  There is no second place.

Hairy Woodpecker came by yesterday.

View this post on Instagram

Hairy Woodpecker just came for a visit

A post shared by Jeff Carter (@pointsnfigures) on Aug 11, 2019 at 2:29pm PDT