Tag Archives: common stock

Before and after an angel investment; stories about why angels are once bitten, twice shy

Outside of Silicon Valley it is extremely hard to raise any financing for a startup. It is not unusual to hear about a $250K – $500K round taking more than 2 or 3 months to close. If the entrepreneur is a first-time founder, without any pedigree (top tier school, well known previous employer) expect it to take longer. In fact according to the data shared by Mar Hershenson (slides below) angels now are not investing until you have some traction.

There are many reasons why angels take so long to invest and insist on multiple meetings, due diligence and more data before they invest relatively small sum of money such as $25K – $50K. Besides the usual reasons such as “hard-earned money”,¬† “better investment options elsewhere”, etc. there is one issue that rarely gets discussed outside closed rooms or in private messages.

The lack of information sharing by entrepreneurs once a round is closed.

I dont think it has anything to do with if the company is doing well or not. Some entrepreneurs just don’t keep their investors in the loop – writing that off as “busy work”, “don’t have time – building the business, gaining customers”, etc.

Looking at my investments alone, 3 of the companies have founders who were referred to me by friends have founders in this bucket. Before my investment, I would get an email or WhatsApp message every 2-3 days with a request for follow-up meetings. One of them was very persistent, following up with me for 5 months before my investment.

After the investment however, radio silence. Now, I have to reach out to them every 6 months or a year to find out how they are doing. While previously I would get a response to an email in a day, now 50% of emails are not being responded to.

To be honest, I understand that entrepreneurs are busy. Unlike VCs who have information rights and have an ongoing cadence with the CEO as part of the board, angels rarely do. Angel investments are mostly passive, with a promise to help with “network” and “connections”. In many cases these are marginally relevant to the entrepreneur.

I have however now developed a new set of checks to ensure I don’t go down the path of an incommunicado entrepreneur.

I ask to be sent their weekly / monthly update to investors or the team for 2 months. The quality, timeliness and consistency of the emails gives me a clear indication about if the entrepreneur is even going to keep others in the know or in the dark.

This is only one of several checks but, if you are an entrepreneur, having a frequent (monthly) update on highlights, low-lights and insights about your business, key milestones and next steps helps you and the investors find ways to help you.

What to consider before you start negotiating your stock options package at a startup

After you decide which startup to join if you are considering switching jobs, one of the key questions becomes how to negotiate a package. I get a lot of questions on % of stock ownership, vesting schedule, preferred vs. common stock etc. I am not a qualified lawyer, so take this as pointers and suggestions not as advice.

Depending on the stage of the startup you are considering, the “complete pay package” may be skewed more towards cash or more towards stock. Most startup founders have realized that to hire great talent, there is not just one thing you need any more. There is a need for meaningful work, great pay and benefits and an awesome culture.

I am going to skim over culture, and meaningful work for this post and assume you have figured out a company that offers both, but now need to negotiate your pay package. Most startups are not going to offer great benefits that bigger companies offer, so you are going to work with a fewer set of variables such as pay and stock options.

First, the pay. There are 3 stages that I am going to consider at startups. First, the pre-seed or seed round, second, post some seed round, before the series A and third, post series A.

In almost all of these cases, I have seen that good startups will end up offering a lower base and salary (80% of the chances are it will be much lower than your current pay) but “try to make it up with stock options”.

In many startups, salaries tend to be a fixed range with little room to negotiate. If you are making a lot of money at a larger company, expect to take a cut in pay. If you are working at another startup, expect to be marginally in the same range.

There are exceptions for extremely well funded companies and the post series A stage, but that’s rare. There are fewer than 20 companies in India and about 100 in the Silicon Valley who can offer salaries that match Google or Facebook, Microsoft or Accenture.

There are 3 important elements to the stock option package – The number of shares, the exercise price and the vesting schedule. The secondary negotiable elements are the type of shares – common vs. preferred, change of control provisions for early vesting and early exercise to save on taxes.

Stock Option Negotiations
Stock Option Negotiations

If your startup is at the pre-seed / seed stage, and you are fewer than 20 employees, you can ask for the total outstanding shares of the company, so you can determine the % ownership. A senior executive (VP Engineering, VP Marketing) can expect in the 1-7% range and folks more junior can expect 0.1% to 1%. This is likely the only element you can negotiate in most startups. If you are looking for unreasonable percentage ownership relative to contribution, expect to get some push back.

The earlier you are at the startup, expect a larger % relative to later stages.

The price of your stock is determined either at the previous¬†round or in some cases at the board meeting (exceptional cases) when an inside round has been completed. After the backdating stock option scandal of the 2005’s no CEO will help their new employees get stock at a lower price, so there’s not much to negotiate here, other than to know the price.

Finally the vesting schedule tends to follow a pretty standard pattern – usually 4 years, with a 1 year cliff. Meaning, after one year at the company, your shares will vest monthly. What you want to learn about is the option to buy your shares and if there are “claw-back provisions” if you leave before an exit.

Most employees dont stay until the exit of the company (or rarely do) and if there are claw-back provisions, you want to be aware of those.

The secondary considerations are important as well. If your contract can specify that your shares will fully vest in the event of a change of control (meaning your startup gets bought) you should seek that.

If your company offers early exercise I’d ask for that option. You might not want to exercise early (since you cant tell if your company will do well or go bust), but it is a good option to know about and negotiate.

Finally, most employees are usually given common stock. You want to know if the founders have as well, or have they, like other investors for example, been given preferred stock if that exists and what the benefits associated with preferred stock (in terms of what the liquidation preferences are).