Ask HN: Should I give my early angels extra equity?

18 points by zangiku 8 years ago | 16 comments

I raised a seed round (500K) in two tiers, on tier late last year, and another this Summer. All the same terms including valuation. Basically, after raising 350K last year, which I thought would be enough to get to profitability, in April I realized I would need to raise the remaining 150K.

One of our investors told me that it was a bit disappointing that the early investors would get the same terms as those just joining now.

Putting aside the fact that the earlier investors did not raise any complaints at the idea of a second close when we got them in last year, I tend to agree with this investor, and would like to keep my current investors incentivized going forward.

I was thinking of issuing them options, perhaps structured so to give them an additional 20% (just mirroring the traditional discount structure in a convertible note).

What should I do?

SeoxyS 8 years ago |

(I'm an early-stage angel, fwiw)

Quick counterpoint to the other advice telling you to give more equity out:

1) Your new investors might feel a bit slighted by this; especially if this additional equity is dilutive, which it probably is.

2) A good angel should understand that raising the additional money is in their best interest and will maximize the value of their equity if it helps the company succeed. I'm not sure what situation you're in; but if not being able to raise the extra capital would be a significant risk; then it's a no-brainer.

I would recommend against giving out additional equity. The beauty of convertible debt or safes is that you can take capital whenever you need it without affecting the cap table and it all gets resolved at your first equity round.

myrandomcomment 8 years ago |

Nothing. Tell them they can put in the extra 150K themselves if they want to keep the others out. They should have 1st rights if they did it correctly.

rohamg 8 years ago | |

this. do not complicate your cap table early with so little capital raised, think long-term. raise the 150K from value-add angels, emphasize "making the pie bigger" to existing investors. Startups and startup investing is unusually binary in outcome: you should focus on increasing your odds of success rather than maximizing value in case of success.

discombobulate 8 years ago |

If the new investors only got a tiny percentage, would the angels have given you some equity back?

relaunched 8 years ago |

The earlier the investor, the more risk they took on. The same terms, if material progress has been made, doesn't seem like the same risk for the same reward.

What is right, and what you can get away with, aren't the same thing. You need more money, a first option to the original investors makes sense, unless the new investors are strategic. In that case, the current investors should understand that value and you can use that to justify the same terms (lower discount for the money, but additional discount for the strategic value).

Any restructuring should be as transparent as possible and you should spend as much time as necessary explaining your rationale to the parties involved. They don't have to like it, but they deserve to know what's going on.

CodeWriter23 8 years ago |

A deal is a deal. My concern would be showing weakness, and thereby inviting all your investors to walk all over you. What happens in the next round? All your current guys start whining. A deal is a deal. Don't willingly spill your blood in shark infested waters.

x0x0 8 years ago |

I've seen @joshu occasionally answer questions like this on twitter, so it may be worth pinging him for an uninterested angel's perspective.

From my pov, it sounds to me like the early angel is basically whining. Personally, I'd offer to let him or her buy up and preserve a pro-rata. My decision would depend on if this is an experienced angel with a good rep, or someone who isn't particularly experienced / not used to how investments go and the idea that you can lose. ie if you didn't raise that $150k, this angel's investment would be worth $0 so that's it's own reward.

Powerofmene 8 years ago |

I think increasing their equity, even if only a small amount, is a gesture that will garner goodwill with your early investors. Cultivating an attitude of "we are in this together" cannot be a bad move for any startup.

pbreit 8 years ago |

Is the complaining investor new or old? I would think obviously old but your description makes it seem like it's one of the new ones.

grizzles 8 years ago |

Yep, it's smart and it's the right thing to do.