Recently in Angel Investing Category

Apply to Open Angel Forum Philly IV

Gabriel Weinberg

September 4, 2012 10:12 AM

The next Open Angel Forum in Philadelphia will be the evening of Tuesday, October 16 at First Round Capital's new digs in University City. If you are involved in a startup that is looking for seed funding, please apply (there is no charge to apply or attend if selected): http://ye.gg/oaf

For anyone not familiar with Open Angel Forum, the idea is to get the best regional angels in a room and put some great startups in front of them. Antonio Tedesco and I started this greater Philly area chapter, and this will be our fourth event.

We expect a lot of the same great investors to show again. We've been working hard to pull in other active independent investors in the region as well as newly minted angels.

If you are an angel investor in the mid-atlantic region and want to come, please let me know. We're also looking for additional sponsors.

Continue reading Apply to Open Angel Forum Philly IV.

Takeaways from three years of angel investing

Gabriel Weinberg

August 28, 2012 10:00 AM

Three years ago we (my wife and I) started angel investing. We set aside $250K to make initial $25K investments in ten startups, and possibly invest more in follow-on rounds if it made sense.

Here are the basic stats:

We've made eight initial investments and one follow-on.
Two exited (Notehall and Locately), one died (Wakemate), and the rest are looking good.
I syndicated (helped them put together the round) in five: Notehall, MyZamana, Locately, Zippykid, and Instinct.
I took a board seat in three: Notehall, MyZamana, and Locately; I took an active advising role in Instinct.
Five of these companies are consumer; two are enterprise; Zippykid is in-between.

As you can tell, I am not a super angel by any means. I don't have the time or money for it, so take my takeaways with that caveat.

Continue reading Takeaways from three years of angel investing.

Long-tail acquirers for medium exits

Gabriel Weinberg

May 15, 2012 10:07 AM

The premise goes something like this: if software is indeed eating the world, then big cos in pretty much every industry are threatened. In reaction, they need to embrace software, and in so doing they face traditional build vs buy decisions. Yet not being software companies themselves, there is more bias towards buy because building is so much more difficult given their lack of core competency in software.

Continue reading Long-tail acquirers for medium exits.

My answers to Peter Thiel's questions he asks startups

Gabriel Weinberg

April 20, 2012 3:19 PM

Blake Master's class notes for Peter Thiel's startup class have been great, which is why I immediately was intrigued by the PandoMonthly event with him. One of the more interesting things to me that was said was his pointed questions to ask startups.

As an angel investor I usually ask:

How did you (founders) come to be entrepreneurs?
What led you to this market/idea in particular (and what markets/ideas did you discard along the way)?
What is your path to victory?
What are your exit expectations?

Peter asks...

Continue reading My answers to Peter Thiel's questions he asks startups.

Are you an indie, angel or venture company?

Gabriel Weinberg

April 6, 2012 3:10 PM

I don't know what Chris was referring to exactly, but as an angel investor this statement resonates with me right now. I've been seeing some really high valuations floating around.

Don't get me wrong -- there is nothing inherently wrong with high valuations if everyone is aligned in exit expectations. The problem is I don't think the alignment is there in many cases.

Continue reading Are you an indie, angel or venture company?.

Why you should choose an ambitious startup idea

Gabriel Weinberg

March 10, 2012 10:10 AM

I believe that ambitious startup ideas have similar success probabilities to their less ambitious counterparts, if not higher success rates. No, I don't have any real evidence. Call it a highly educated guess.

Continue reading Why you should choose an ambitious startup idea.

Red flags in emails to angel investors

Gabriel Weinberg

February 26, 2012 2:12 PM

I've written before about how the very first email to an angel investor really matters, or at least to this angel investor. It's very easy to get thrown in a bucket of wannabes or bad first-timers. Here are a few of those red flags from my perspective.

Continue reading Red flags in emails to angel investors.

Apply to Open Angel Forum Philly III

Gabriel Weinberg

January 23, 2012 10:43 AM

The next Open Angel Forum in Philadelphia will be the evening of March 22 at Morgan Lewis. If you are involved in a startup that is looking for seed funding, please apply (there is no charge to apply or attend if selected): http://ye.gg/oaf

For anyone not familiar with Open Angel Forum, the idea is to get the best regional angels in a room and put some great startups in front of them. Antonio Tedesco and I started this Philly (loosely defined) chapter, and this will be our third event.

We expect a lot of the same investors to show again. If you are an angel investor in the mid-atlantic region and want to come, please let us know. We're also looking for sponsors.

Continue reading Apply to Open Angel Forum Philly III.

My investment decision starts at your first email

Gabriel Weinberg

January 20, 2012 9:01 AM

I few weeks ago someone asked me how early does a decision start to form about whether I would make an angel investment or not. Thinking back and looking at prior nos and yeses I have to say a lot happens when reading that very first email.

Of course there are a ton of nos and hardly any yeses, so it is a different kind of decision than many. Nevertheless, at least for me, it isn't just that I'm looking for ways to say no. If that were the case you should shoot for being as short and vague as possible to get the next meeting.

Continue reading My investment decision starts at your first email.

What's your startup's reserve price?

Gabriel Weinberg

December 14, 2011 9:44 AM

Here's some acquisition and financing advice: know your reserve price. That's the minimum price (easiest to think about cash in your bank account at close after taxes) that you'd be willing to receive in exchange for your company. Corollary: if it isn't cash, then it needs to be heavily discounted--to zero in many cases.

It's a complicated question, which is why I strongly encourage you to think about it ahead of time, and ideally talk it through with some people who've been through acquisitions and are "richer" than you. In the acquire-hire age, your reserve price can be tested a lot and quickly, especially at the early stages. If you are caught off guard, you can get sucked in quickly to something you may regret later.

Additionally, I think you should know your reserve price before seeking investment of any kind. Investors are generally looking for 10x+ returns. Quite frankly, if you have a valuation/reserve-price combination that doesn't yield such, you shouldn't be taking investment.

And there's nothing wrong with that! In fact, I've argued that no or minimal investment may maximize your financial outcome in some cases, and is at least worth considering.

Talking about reserve prices seems to get into fuzzy math really quickly. Would I take $2M but not $1M or $15M and not $10M? But you should really take it seriously because these differences do matter, especially at the lower end of the scale.

Yes, everything feels different when you have an offer in front of you. And that's the point of thinking about it ahead of time. It's hard when you have no real savings in your bank account to turn down $1M. But that can be the right decision, especially if you have any kind of traction.

Fundable vision

Gabriel Weinberg

November 22, 2011 8:30 AM

When I get an angel pitch, here's my initial funnel:

Is this person a crackpot?
Is this person a wannabe?
Is this vision fundable?
Is this vision fundable by me?
Is this vision plausible?
Is this vision probable?
Are these people capable of executing this vision?

I've been getting a lot of angel pitches lately that I've been quickly dismissing on #3: is this vision fundable? Frankly, the dismissals are pretty much from a lack of communicating any long-term vision. Here's my #3 sub-funnel:

A. Is this a whim project?
B. Is this a side project?
C. Is this (for lack of a better phrase) a lifestyle business?
D. How does this get to 1Min revenue?

E. How does this get to 10M in revenue?
F. Are they thinking big enough?

Product demos are key to a good pitch, but in and of themselves they are static, and really don't get anywhere in this sub-funnel. To do that, you need to tell a compelling story about how you're going to be part of a big market.

Of course I may think you're wrong on market or a variety of other things, but communicating a long-term vision is a necessary condition to starting a real funding conversation.

I realize this is a very difficult request. It's easier to try to find a niche within a niche in the app world. And that may make a great business for you. But it isn't a fundable vision.

What story are you trying to tell to potential investors?

Gabriel Weinberg

September 7, 2011 3:55 PM

Lately I've found myself giving a lot of pitch deck advice for seed rounds. Usually I point people this post and tell them to a) stick to six slides with mostly images/graphs; b) drop any financial projections; and c) drop any executive summary or even longer stuff.

Then last week I read a @bryce post entitled You Can Never Size a Market in Excel. I agree with his specific point about market sizing, but I think it can be usefully generalized as well. The following is the end of the post, which frames that generalization.

An investor's instinct around something as fundamental as whether your business can reach the scale needed for venture capital returns is one that won't be found scouring the latest market forecasts from Forester or Goldman Sachs. It won't be found in endless meetings and it won't be found in detailed financial forecasts or market sizing exercises.
It will be found in the connection an investor makes to you, your product and your vision. Either they will believe it or they won't. If they do, they'll want to invest. If they don't, they'll simply keep wrestling with the question of "how big can this get" in an unresolvable circle of swirling doubt. All of the Excel wizardry in the world won't resolve it.

Your story either clicks with an investor or doesn't, and in my (albeit limited) experience that clicking either happens really fast or it will take too long to matter.

This is why that first impression, including your email, intro path and pitch deck is so important. It's your chance to make that click happen, or blow it. It's hard to recover from the wrong framing.

So with that in mind, I'm changing my pitch deck advice for seed rounds to be a bit higher level. Yes, you should stick to six slides blah blah blah, but you should be thinking more about what story you are telling to potential investors. And if you're really good, what story you are telling to a particular investor.

For me at least, I think you want to nail four things in your story:

What will it take to get this business to 1-3M revenue? This part of the story shows you've thought about how this could be possible, how many customers you'd need, how much they might pay/convert/draw in/whatever, etc. None of it needs to be correct, but it needs to be plausible. If you already have some traction, perfect -- use that as a lead-in.
What are the possible medium and longer-term exit opportunities? This part of the story shows you understand your space, how you align strategically with it, and how big you're thinking. Again, be plausible. Anything else is a red flag.
What about your team says you can execute on this? This part of the story shows you personally, and I'd get really personal.
Why are you raising money? Every story needs an ending, and this is usually it. We're trying to hit this milestone by doing a, b and c. That milestone is important because of x, y and z.

Entrepreneurs like to include all sorts of other stuff in their presentations. I think anything that isn't on story is irrelevant. Your goal is to make that story compelling so it clicks with as many people as possible.

Of course there are many other ways to tell the story. You could take the where we've been, where we are and where we're going approach. You could concentrate on what you think is your most compelling piece of data/traction and tell the story behind that. There are actually a bunch of options.

The point though is pick the one that you think has the highest probability of clicking. If it clicks, that doesn't mean someone will invest quickly or at all, but it is usually a necessary condition to investing. A corrolary to that is if you don't think you clicked, then you should probably move on.

Generally, but not always, you can feel if someone is excited or not. Body language helps a lot here, which is why it is a good idea to try to meet in person or at least push for Skype video.

I hope it goes without saying that when you have that meeting you should be telling that story. I wouldn't walk through the presentation at all unless someone asks. Instead, just start story telling.

Update: I have some evolved advice now.::

Apply to Open Angel Forum Philly II

Gabriel Weinberg

August 1, 2011 9:15 AM

Antonio Tedesco and I held the first Open Angel Forum Philly in March. We're calling it a success as investors want to come back and companies were offered funding.

That's why we are proud to announce that we're making it a regular event and OAF Philly II will be held on the evening of Sep. 20th (again at Morgan Lewis).

If you are involved in a startup that is looking for seed funding, please apply (there is no charge to apply or attend if selected): http://ye.gg/oaf

For those of you not familiar with Open Angel Forum, the idea is to get the best regional angel investors in a room and put 5-7 great startups in front of them. We hope it is a funding powder-keg.

We should have an awesome group of investors attending, just like last time. If you are an angel investor in the mid-atlantic region and want to come, please let us know.

We're also looking for a few sponsors.

Here is what we're looking for with regards to startups:

US companies. You do not need to be associated with Philly. In fact, last time we had companies from Austin, NYC, Minneapolis and Chicago, in addition to Philly.
Working demo, preferably already launched with some engaged users. The event format is a five min demo followed by a five min Q/A followed by networking. It's not a traditional pitch event with slides, so a working demo is essential.
Products matching our investor preferences. Our goal is to get you funded, and to do that you can't look too different than things our angel investors generally invest in. This generally means software of some form.
Terms matching our investor preferences. Same as above, our angels are looking for good deals. This generally means reasonable valuations and seed rounds (essentially first money in).

Here is the process:

We're accepting applications for OAF Philly II through Fri August 26, 2011.
Antonio and I will then go through and select the companies that fit the above criteria.
We will then try to hold Skype demo sessions with all those companies. Last time that was about 25 startups. We may involve some other angels in this process.
We will then extend invitations until the six slots are filled. We're aiming to do that by Sep 12th.

Feel free to ask questions in the comments, and I'll do my best to answer.

And apply already! http://ye.gg/oaf

Continue reading Apply to Open Angel Forum Philly II.

Missed opportunities

Gabriel Weinberg

July 23, 2011 1:00 PM

I've been at the right place at the right time with the right idea, but for one reason or another didn't act on it or execute. Here are a few of those missed opportunities in startups and investing:

Yahoo IPO, Apr 1996. I was ready to put all my money into this. Granted, I was 16, so not a lot of money, maybe ~7K. I had been on the Internet pre-Web and really thought they were onto something. I got talked out of it and didn't do it. Of course, I could have been wrong and lost it at all too!
Posterous, 2001-2003. I had a thesis (which still seems true) that email is perhaps the easiest path to virality and mainstream adoption of Web services. I had three different projects around that time where you could send an email to an address, and then the service would auto-create an account and auto-publish content. I wasn't thinking big enough though (mine were too nichey) and I didn't have enough staying power. I did ride the same email thesis through my last successful company, but it had very little to do with publishing content.
Bitcoin, 2010. I was following this closely and ready to pull the trigger here, but just didn't because I thought it would take a lot of time and I'm so busy with DuckDuckGo and other things. I didn't think hard enough about it to realize I should have just bought coins instead of doing calculations around mining for them.
Angel Investing, ongoing. As like probably most investors, I've already passed on several things that are doing awesome. Now they stare me down every day!

I can't say I have any regrets though, and that's my central point. I like to think about startups as a career path. There are many apt analogies here, but along such a path there will be bumps, ups and downs, many at-bats with swings-and-misses. That's just the nature of the game.

If you don't have your fair share of failures after a while, then you're probably not trying hard enough, or at least not exposing yourself to enough opportunities. Nobody's perfect so to have captured opportunities you need missed ones too.

Open Angel Forum Philly Recap

Gabriel Weinberg

March 22, 2011 11:02 AM

Last week was the first Open Angel Forum Philly, organized by myself and Antonio Tedesco.

We selected six companies to give five min demos (followed by five min of q/a). Antonio has a short write-up of each company on his blog, and here is even a shorter summary:

Fancy Hands (NYC) - personal assistants for everyone.
RezScore (Philly) - resume analytics.
Row27 (Minneapolis) - official mobile apps for sports teams.
SpeakerWiki (Austin) - marketplace for speakers.
Sqoot (Chicago) - adsense for deals.
Contently (Philly/NYC) - marketplace for high quality content.

If anyone wants an intro for any of these companies, please let me know. They all did a great job presenting and I hope they all get funded.

We chose these six out of about 80 applications. Of those 80, we did Skype demos with about 25. Obviously, we had to pass on some great companies.

To get a view into our process, here are some groups of startups we passed on:

Hadn't launched.
No engaged uses after launch.
Too high valuation.
No software component.
Too far along in fundraising process.
Non-US.

We also had a great selection of angel investors in the room. In fact, the most surprising thing to me was that everyone (except one out-of-towner) showed up!

Antonio and I debriefed on Sat, and beyond some little things like having less tables next time, we aren't planning on changing too much next time around. We hope to hold the next one at the end of the summer, probably mid-September.

If you have any questions, feel free to ask in the comments, and I'll do my best to answer.

The acqui-tail

Gabriel Weinberg

March 18, 2011 1:22 PM

Here's what I'm seeing (anecdotally): more Internet startups getting started and seed funded, but series A funding not increasing at the same pace (or at all). This led me to conclude there is an increasing risk for these startups to find follow-on financing.

But does that also mean all the startups and angels are largely going to end up with nothing? Not necessarily.

Dave McClure et al. seem to be betting on the rise of the small(ish) acquisitions that deliver fine exits to the entrepreneurs and angels. I'm not saying that is the only way to get liquidity, but it is the one I want to focus on in this post.

For this investment thesis to work, it seems there has to end up being a long tail of Internet startup acquirers. That is, the tech giants (Google, Microsoft, etc.) aren't going to acquire enough companies to make the numbers work. The concept of acquiring Internet startups must extend to M&A departments outside the tech sector.

One argument for why that might happen goes as follows. These large companies are spending more and more on digital stuff and so as it becomes more of what they do day to day, they're going to want to get into it more. One way to do that is acquisitions. And as one company in a given industry becomes good at Internet startup acquisitions, it then becomes a competitive advantage thing.

It would of course be great for Internet startups. The real money in acquisitions is in strategic buyers, but those buyers have to actually think you are strategic :).

Personally, I think it will happen. Maybe people have data that it is already starting to happen, but I haven't seen it yet. I was going to crunch some crunchbase data, but I'm a bit swamped. I might do it soon though if no one points out any existing data trends.

Philly Open Angel Forum is now accepting applications

Gabriel Weinberg

January 6, 2011 8:01 AM

I'm proud to announce that Open Angel Forum (OAF) is coming to Philly on March 16 (in about two months). We're now accepting applications for startups looking to raise angel rounds in that time-frame. Here's a short URL to share: http://ye.gg/oaf. The applications are powered by WizeHive, a local Philly startup.

For the unaware, OAF is a group started by Jason Calacanis to serve as an alternative to the traditional angel pitch events that either cost startups money or take up too much of their time because of the slow group processes often involved to approve investments. Here's the actual mission statement:

The Open Angel Forum (OAF) is dedicated to providing entrepreneurs with access to the angel investor community based solely on merit (and without fees). Additionally, we strive to build collaboration between angel investors and to inspire high-net worth individuals to become angels.

Morgan Lewis (a law firm that has a great local startup practice) has been gracious enough to host to event for free. Philly's startup scene is heating up, but we've had great angel investors for a while. We should have 20-30 active, independent Internet/software startup angels in the room.

You do not need to be from or associated with Philly to apply, though I do hope we get some good applications from the area. As you might have guessed from the header of my blog, one of my goals is to help the startup scene flourish here.

If you're a local angel and I haven't talked to you yet about it, please let me know.

Update: deadline for applications is midnight (EST), 2/18.

Update 2: you do not need to be associated with Philly to apply. In fact, we're looking for great startups from all over, especially from under-represented places like MD, NC, VA, etc.

Update 3: check out the list of angels planning on attending.

How I (try to) add value as an investor

Gabriel Weinberg

October 26, 2010 12:00 PM

When raising money, startups sometimes ask me how I would add value as an investor. I think it is a great question that unfortunately often gets unspecific answers.

This post by David Hornick of August Capital (a VC) is the best I've seen at laying out how investors can add value in general. And I'm sure each investor can do a little bit in the categories David lays out: recruiting, raising equity, raising debt, introduction, strategic advice, save time, create a Keiretsu, PR, and making exits happen.

The best place to look for specifics is in an investor's portfolio companies. It seems like it could be like asking a family member for a reference, but I've found that startup founders are very candid with other founders about these kinds of topics.

I would get some of those founders on the phone and just ask them how the particular investor has helped them, how much they've been involved, etc. I'm confident that if you ask my portfolio companies you'll hear the following from them.

Relative to other investors...

Where I can add the most value:

Raising a seed round. I led the last two deals I've done in the sense that I put together the syndicate of the right angel investors, negotiated the terms for them, and made sure it all closed quickly, fairly and without incident. For both deals we used the open source Series Seed docs, which kept things extremely low cost (actually zero legal on our end). I'd basically like to continue filling this role.

From the company perspective, I think this is quite appealing, especially if you are not a super hot company and not in the valley, which is the space in which I operate. One minor quibble I'd make with Paul Graham in his recent investing essays is that for a lot of startups it takes a lot longer than a few days or weeks to raise a seed round. The median is much longer because most companies fail to raise anything, and the mode I see seems to be somewhere at 4-6 months.
Day to day business advice, i.e. been there, done that. I've been doing this startup stuff for a while now, pretty much all by myself or with one other person. So I've done most startup things, i.e. from incorporation papers all the way to an exit and everything in between. Moreover, I want to be closely involved. For most of the companies I'm involved with, we try to have frequent Skype chats (weekly to every few weeks) to discuss whatever is in front of them.
Technical stuff. I'm a hacker that has built a lot of sites and scaled some to a decent degree--certainly not facebook/twitter scale or anything, but on the order of 20 million users. I've pitched in when companies have been in a bind, e.g. debugging downtime, writing a script, solving email spam problems, etc. Of course, the closer you are to my core tech competencies (databases, data mining, Web crawling, uptime, etc.) and particular technologies I usually use (nginx, postgresql, Perl, JavaScript, etc.) the more I can help.
Domain Knowledge. If you're trying to do something very specific that I've already done or am researching, like engineer a viral loop using email, spider and organize a lot of structured content, SEO, etc., I can be incredibly useful.

Where I can add average value:

Raising a Series A round. Truth be told, I'm looking to invest in things that if all goes decently well, a Series A round may not be strictly needed because the company would be profitable. So if it is raised, it should be easier to do so because of the traction they would have. Nevertheless, things don't always go as planned, and so it is important that I cultivate relationships with the right VCs who could help fund portfolio companies. I've been actively working on that, especially locally. For example, I'm bringing Open Angel Forum to Philly next year and have been meeting essentially everyone in the city involved in funding Internet startups.
Introductions. You can see from my LinkedIn who I'm connected to. Again, I'm actively expanding my network all the time, e.g. through my Traction Book interviews. It's definitely improving, but there are certainly many investors with more substantial networks. A lot of this related back to amount of deals. Frankly, I haven't done that many, but this should of course improve over time.

Hiring. This seems to be a major problem for startups. I actually started a local hackathon group three years ago (200+ strong now) to help make connections between people interested in startups, hiring being one type of connection. And I have introduced people that have resulted in hiring, but the problem is still a big one, especially if I continue to invest nationally. That is, things I do in Philly, like copy good programs from other cities, won't help a company in Boston (unless they don't mind a virtual hire). I think what we really need is an organized startup job board (yes, I know there have been some), that is promoted by major startups/startup hang outs and has a barrier to entry to applicants, like HN karma or something. This is half baked atm, but maybe someone will run with it.

What I can't do:

Get you on Techcrunch. Or PR in general for that matter. Honestly, I haven't really figured this piece out yet, though I have been doing interviews on it to learn more. Duck Duck Go has had a lot of good press, but it has pretty much been unsolicited or based on warm intros. I would like to say I'm working on meeting the right people in the press, but I'm not. I just don't have enough time right now, and I don't like to travel.
Get you traction. Yes, I am slowly working on a book on getting traction. That means I can tell you lots of strategies that you should check out and even tactics within them. But that doesn't mean attaching me to your startup will actually get you traction. In fact, I want to invest in things that have a spark of traction already.
Help much with managing employees. I really haven't managed many people, so my experience is very limited here. But I do try to include people in seed round syndicates with varying (and relevant) experience so there are investors to go to for this kind of advice.
Help with big company politics, sales cycles, etc. Same story.

Clearly each startup needs help in different areas. So depending on the particular startup I could be very useful, or not so much. I hope this post helps you figure that out.

I should also say that I'm willing to help without investing, i.e. dole out infrequent informal advice or become more of a formal mentor. If you need some advice, I suggest writing to hacker angels or techstartu.ps. I'll see it, and you'll get in front of other people that could potentially help more.

4 out of 5 hacker angels invest in Locately

Gabriel Weinberg

September 9, 2010 10:00 AM

I'm proud to announce the first company in which a majority of hacker angels invested: Locately. HA is not a fund--just a group of hackers who also do individual angel investing. This means we each individually decide to invest, in this case 4 out of 5 of us.

Locately is leading the location analytics market. They analyze GPS data from opted-in consumer mobile phones to help businesses better understand their customers. For example, they can help companies determine who their real competitors are, if physical advertising is actually working, or where to put their next stores.

There are really a lot of possibilities. Just as web analytics is an essential tool for online marketing, I believe location analytics will become essential for offline marketing.

The easiest way to get investment quickly is to have traction because traction trumps everything. And Locately has traction. Even so, many angels (including myself) want to actually know the founders beforehand as much as possible. This desire stems from the fact that doing a startup involves a lot of meandering and critical thinking, and over time you can start to get a sense of how people think about and react to things, as well as see progress.

So I'm fairly certain that starting dialogs with potential investors long before you are raising money will increase your chances of actually raising money. There are many ways to do it, e.g. sending periodic newsletters, asking for feedback on product/strategy/fundraising/etc., or even bringing people on board as formal advisors. In this case, I communicated with Drew (one of Locately's founders) on twitter, and then we hung out for most of Angel Boot Camp. That really kicked things off.

Over the past few months (since announcing hacker angels), we've dispensed a lot of (I hope helpful) advice. To get some yourself, just email us: ha@hackerangels.com

Negotiate terms at the term sheet stage

Gabriel Weinberg

August 4, 2010 12:40 PM

I've been involved in a few deals now (selling my last company, angel rounds, things involving my portfolio & advisor companies, partnerships, etc.). I've seen a pattern that I hope I can convince you to avoid. Here it is:

You get a term sheet, and like some of what you see, e.g. price.
For lots of possible reasons (don't want it to go away, pressure, excitement, lack of understanding, etc.) you sign the term sheet to get to the next stage.
You then get the draft deal docs based on the term sheet.
You start reading through them and consult with your lawyer and see a lot of scary stuff.
Some of that stuff was actually in the original term sheet at a high level.
You start pushing back on these terms that you don't like.

There are a two main problems with this scenario, from your perspective...

You'll usually end up worse off than if you negotiated the term sheet properly. The problem is you'll get serious push back of the form "you already agreed to that in term sheet." Yes, things are probably still negotiable, but you've lost a lot of your positioning, and frankly, they make a good point. So you'll probably be more likely to get stuck with things you don't like.
You're significantly lowering the probability of closing. Each term in a term sheet gives and takes off of others. So when you try to clean it up after the fact, you're really asking the other side to go back to the term sheet stage and put everything else back on the table. Again, this is doable, but it puts the deal in reverse, and that is never good. You want to maintain momentum.

Luckily, this is an easy issue to resolve. First, don't rush into anything. If you have a term sheet, you certainly have enough time to reasonably understand it and go over it with your lawyers.

Second, make sure you understand every point in there. For VC/angel stuff, start here. And finally, negotiate. A lot of stuff in there is probably changeable, so figure out what is important to you and push for the deal you want.

After the term sheet stage, I can guarantee you there will be more negotiation on the details, so it really makes sense to really get agreement on the high level stuff.

Main Index | Archives | Duck Duck Go »

Recently in Angel Investing Category

Apply to Open Angel Forum Philly IV

Takeaways from three years of angel investing

Long-tail acquirers for medium exits

My answers to Peter Thiel's questions he asks startups

Are you an indie, angel or venture company?

Why you should choose an ambitious startup idea

Red flags in emails to angel investors

Apply to Open Angel Forum Philly III

My investment decision starts at your first email

What's your startup's reserve price?

Fundable vision

What story are you trying to tell to potential investors?

Apply to Open Angel Forum Philly II

Missed opportunities

Open Angel Forum Philly Recap

The acqui-tail

Philly Open Angel Forum is now accepting applications

How I (try to) add value as an investor

4 out of 5 hacker angels invest in Locately

Negotiate terms at the term sheet stage

About Me

on Philly Startups

on Starting Companies

on Startup Lifecycles

on Getting Traction

on Traction Verticals

on Raising Money

on Angel Investing

on Acquisitions

on Running Companies

on Marketing

on Hiring

on Programming

on Sysadmin

on Search

on Productivity

on Life