I recently had lunch with an entrepreneur. He’s a graduate of one of the major accelerator programs here in town. A very thoughtful person.
For his seed round, he raised money from angels. Unfortunately, one year later, he says that only half of them will even reply to emails. The rest have disappeared. This entrepreneur told me that the angels sold very hard, that they would add a lot of value to him. He is now very disappointed.
He has “dead” equity on his cap table.
This blog post is not a criticism of angels. At our firm, we work with many of them and have had very good experiences. But this lunch reminded me yet again that it is very hard to break up with your investors, whether they are angels, VCs or strategics.
I wonder if a convertible note from a person or firm who does dozens of these a year will give much long-term commitment. Or, will you be one among many “options” in that portfolio?
And so, the best advice I have for entrepreneurs is this: choose wisely. Take your time.
Once you let in that investor, it is almost impossible to get them out. If they own a piece of your company and are not adding value, that is unproductive, or “dead” equity for you as a founder in terms of go-forward value.
One of our founders is going through this now. Against our advice, he took money from a strategic we didn’t know and normally doesn’t invest in ventures. Fast forward. That investor now has bailed. That founder now has significant “Founder’s Remorse.”
7 thoughts on ““Dead” Equity and Founder’s Remorse”
Hi Jo. I get your general meaning here but I think you are a little too harsh. “Dead” equity? That equity was purchased with dollars, dollars which were dutifully delivered to the company, no? It’s nice to have investors who “add value” (whatever that may be) but over the long term, it is foolish to expect investors to be active participants in the ventures in which they invest. particularly angel investors! unlike VCs who get paid salaries (often fat ones) to babysit portfolio companies and who in any case have to manage fund reserves and follow on financings, angels get paid nothing and usually cant do follow ons. so to expect them to somehow earn their shareholdings beyond the dollars they have invested is unrealistic.
the best way to avoid “founders remorse” is to have realistic, clear-eyed “founders expectations”. investors provide dollars and usually not much else. “active” investors are as often nagging and unhelpful and even detrimental as they are productive. etc
i am so glad i cut my teeth as an entrepreneur when the “ecosystem” didn’t even exist, really. back then (1990s) entrepreneurs had to scramble and scrape and labor in total obscurity and isolation and basically assume that if they didnt do something themselves it wouldnt get done. ah, the good old days!
Steve, you raise a good point. The dollars were contributed and so the investor deserves that equity. I agree.
You also mention that expectations setting is the key. I also agree.
I think the point I’m trying to make is this: if you’re going to back an entrepreneur, whether as an angel or VC, you should be clear about your role–and then do what you say you’re going to do.
The entrepreneur I met definitely feels that he was over sold. Now, perhaps it is a case of “buyer beware,” but I definitely feel bad for the guy.
In the case of our portfolio company, that investor definitely made a lot of commitments–and, failed to deliver.
While expectation setting is important, if the angel isn’t “doing any harm” I don’t see how it could be considered bad. They provided capital early in the life of a company. If that’s all they do, they were still a net positive for the entrepreneur.
Now, it’s obviously much better if the angel or seed investor lives up to their expectation. We’ve invested in post seed rounds in many cases where there were super active angels and others where the angels were completely disengaged. We’re fine either way – obviously the more help the entrepreneur gets the better, but there’s no judgement on our side on the past.
It’s become somewhat entertaining with VCs who are sprinkling around lots of little seed investments and then not engaging at all. In these cases, they generate real reputational damage with the entrepreneurs (which is very predictable) and word is getting around about which firms help and which are just taking options on the next round.
Finally, have you ever just considered buying out the seed investors who are inactive? If the entrepreneur is unhappy and you come in at a step up to the last round, why not just work with the entrepreneur to give the angel(s) a quick win (2x – 3x – whatever your markup is)? It doesn’t have to be dead money!
Hey Brad, thanks for making the time to read the post and to comment!
(BTW, your post on “maker vs. manager” hours has really forced me to re-evaluate how I spend my time. Also, interesting that you post that 5 am to 7 am are the most creative hours. I find the early morning is when I’m inspired to blog.)
Regarding your comments:
– Yes, perhaps we’ve been lucky, but we’ve had only good experiences with angels thus far
– The entrepreneur whom I reference, who is disappointed in his angels, isn’t in our portfolio. I really like him and the idea, and we’re considering pricing the Series A. A buy out of the angels is a great idea
– The portfolio company I reference unfortunately raised its first round from a strategic. That is the investor that has bailed, and we’re working through that now. I think we’ve found a solution, but it has taken an emotional toll on the CEO and upped the legal bills
Say hi to Seth, Ryan and Jason for me….
I agree with others, if money was contributed, it’s not dead equity. I think the problem is founders or team members that leave the company and leave equity on the cap table. It’s unproductive, and makes next round financings tougher.
Great point. It’s one reason why vesting is important.