Case For Not Taking Small Investments and Why Early Employees Are Unsung Heroes of Startups

by Jan 26, 2014Lessons Learned

It does not come as a surprise to anyone who knows me that I am not a stranger to getting into the occasional passionate discussion. This weekend I made a statement that caused such discussion. Unfortunately, Twitter is the worst place to have a discussion. Arguments in 140 character format makes people extremely susceptible to interpretation and overreaction to individual words’ meaning. It does not help that people who were never part of the original conversation often end up getting involved halfway without understanding the original context—unlikely a constructive or valuable conversation.

So what the heck did I say?

“Apparently, in Boston, you are an angel investor if you wrote a measly $10K check. If that is the case, half startup employees are super angels.”

Now, if reading the following makes you pissed off, well, I am sorry you feel that way. Having been in the trenches and seen things many of you may not have a chance, it has to be said. The only thing I would soften or change is the word “measly.” OK, that is not the correct word. Maybe “insignificant” or “not as impactful as you make it sound” is more fitting. Besides the word choice, here are my points.

  • Maybe that friend or family member giving you $10K makes you feel eternally grateful, and you should. But if this person is not an accredited investor and hence does not have the net worth to absorb the loss, I don’t believe you should be taking that money.
    • #1 reason unsophisticated investors don’t truly understand the risks and require a disproportionate amount of handholding. You end up paying the price down the road in legal and administrative expenses for taking that money.
    • The odds of seeing that money back, let alone getting any return, are in single percentage points. Plus, those small money seed round folks get pummeled by investors in ongoing rounds. The unaccredited investor is better of putting that money in mutual funds. You have to assume you will lose the investor’s money, and you will ruin the relationship.
  • Most take those small checks (and yes, I stand by my statement $10K is a tiny check, considering costs to administer it) are usually taken directly without going through professional angel group/syndicate. You are desperate. You need the money. You need someone to validate you by giving you money (c’mon, be honest). What you end up with is:
    • No proxy, no single point of management for those small investments, so you have to chase them down for documents, signatures, votes. This act of “herding cats” (as one of my friends puts it) detracts you from what you should be doing – developing the product and finding early paying customers.
    • In later rounds, you are bound to have most of these small investors sit out the rounds, and they get diluted to heck. Now they are bitter and signaling a lack of confidence in you, though really they can’t afford to pay to play. And since they are not behind an angel group or syndicate, they often naturally will attempt to wield more influence over your decisions than the percentage of ownership they represent. Not all of them do, but you are bound to end up with Carl Icahn, except their investment isn’t significant.
    • But most important: since when doing consulting work or projects on the side is so beneath us? Since when getting the courage and asking for money from your 1st customers is such an insurmountable task? At almost every startup I was part of, that is how we paid for the development of our products. In 2+ years of my current team building Robin, we’ve managed to get to respectable revenues by asking even early beta customers to pay and taking on projects not related to the core product to help pay the early bills.

Yes, there are rare cases you take in this small check from folks who are extremely useful to your fledgling young venture. These folks have succeeded before, have the means to lose that money they gave you, and bring in actual revenue and connections. The fact is that these individuals would help you as much, even if you did not take a dollar from them.

2nd part that most arguers missed was my statement about early employees of the company being the real early angel investors. It is not news to most successful founders that 1st 20 people to join your team can make or break your company. Our early teams are the unsung heroes. They are rarely publicly thanked, unlike early investors. That is just not right. Our early employees take higher risks and more abuse than most early investors.

  • I had a chance to recruit many folks who chose to take huge pay cuts, often under heavy skepticism of their spouses. They are my heroes! They took the huge risk of having a blemish on their resume.
  • “But they get paid a salary!” To add to my statement above, they end up with lower total compensation over time and their equity, if even granted, is not proportionate to the risk they took. I am yet to hear about one company with an anti-dilution clause for down rounds being applied to employees. Even if exit happens, many will not see the return commensurate to what they have put in.
  • Early employees endure constant changes in strategy, daily uncertainty, stress, failures, mistakes. They do what it takes to make the founders successful. I can’t stress enough the weight of this point, having seen 200+ of my startup brothers and sisters throughout my career serve their companies. Just look at what most startups do to the health of early employees!

Like in my own case, we sometimes believe our founders and the company’s mission so much, we go to the final day with them. My 1st company out of school landed me with $50K in credit card and other debt. I had to work three jobs to pay everyone back. I never even got a “thank you” or “I am sorry” from the founder, who in the end blew it. I am definitely not the only one who had the “pleasure” of personal hell after investing in a startup.

You don’t have to agree with me, and I don’t expect you to, but I have been long enough in this game and paid my dues to have formed this view.

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