Reality of Angel Investing

A founder emailed me for advice about an investor who wanted their money back. The note had come due awhile ago and he was expecting his cash back with the interest. Spoiler Alert…that is never going to happen.

I have often espoused that importance of legal documents from the get go of building a business. I am not a fan of the SAFE documents or notes in general because they are nothing but a piece of paper with zero work done and lessons to learn. Going through the education of understanding a document and the responsibility of taking cash from others is worth every cent especially from the get-go. Notes and SAFE documents cost very little to produce so I get it for a first round but that is the one and only time to have them.

Founders take capital with the hope that the money they raise will give them the ability to grow their businesses, their hopes and dreams, their ideas. Investors participate because they too believe that there is an opportunity to support a founder financially that benefits their pocketbook but also benefits their desire to help others build.

Many early stage angels should not be putting cash out there unless they understand that the chances of every seeing that capital again is low. I have seen investors write to a founder (what this particular investor did) and ask for money back with interest. The business is still alive but struggling so where does he believe the cash is? Then I have seen investors see how the company is growing and they expect a return when it is time to put money back into the company not take it out. I have told founders just to tell those investors to read their documents because they are not getting their cash back now unless some secondary buyer wants to buy them out.

Certainly when the company gets into their Series C and onward there is opportunity to sell for the first set of investors, as there should be. Secondary markets should be bigger than they are. But if you are investing with the hope that you will get your capital back in a few years or a note with interest regardless of the companies standing, then you should NOT be investing in early stage businesses. Remember whatever you put in has a bigger potential of not coming out.

Comments (Archived):

  1. awaldstein

    Truer words were never spoken.Investors with no operating experience or with no startup experience themselves, are invariably the most difficult to understand this.

  2. Kirsten Lambertsen

    I had an investor exactly like this. She was SO much work and contributed nothing.If I ever do it again, I’ll absolutely be asking investors what their expectations are in the event of unexpected challenges or if things don’t work out. It’s a buzz kill, but good investors won’t be frightened by it and will give a reasonable answer.

    1. Gotham Gal

      Those are definitely the people who give nothing and frustrate you to no end.

  3. William Mougayar

    Yup, that’s why the portfolio approach is key (from an investors’ point of view). As long as some of them return decent multiples over time, you can more easily write the others off.

  4. jsrand

    Why founders need to interview and screen investors.

    1. Gotham Gal