Ask HN: Should I give my early angels extra equity?
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?
20 comments
[ 3.2 ms ] story [ 47.4 ms ] threadOP, how many hours a week do the angel investors work on the startup?
Pretty sure the investors are already motivated in the OP's success. Unless they don't like money.
They sound like professional investors. You shouldn't give them free shit.
For what it is worth I have invested in angel rounds, arranged for a startup to receive angel rounds, done a few startups and have held board seats. Also to the OP - warrants with a note is something to look at.
Angels I have worked with have always been great and would not expect a "gift" of additional stock. That being said, if an angel had skills, products, or services that I otherwise would have paid more for, I worked with them to supply what was needed for far less $ and future stock options.
Experienced Angels realize that raising more money is often necessary and if additional money is not raised their risk on their investment increases exponentially. Further, most would have first right to increase their investment so they can invest and prevent their dilution as well.
Communication is the key and I was fortunate to work with good angels. I had their back and they had mine, hence we were in it together. They never expected to be given anything but because we communicated their skills and networks became readily accessible.
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.
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.
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.