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- Taking Money From Angels Part 2
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Taking Money From Angels (2/2)
Read time 1.4 minutes.
On Monday, we discussed what you should be looking for when getting funding from Angel investors. Today, we are going to discuss some red flags that you should be running away from!
Board Seat Requests - If you are raising from Angel investors, it’s likely a pre-seed/seed round. At this stage, you should NOT be giving away board seats. It’s really that simple: if they are asking for this, then you should be running away.
Non-Standard Terms - If the investor asks for non-standard terms, this is a major red flag. 99% of the time, the standard YC SAFE should be sufficient. If they are trying to get terms you’ve never heard of or struggle to understand, then they likely aren’t the best partner. (One exception here is terms that are being added for tax reasons. This is more common when working with a contractor in exchange for equity or in countries like the UK where there are government incentives to invest in startups. In those cases, this isn’t a red flag.)
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Anti-Dilution Clauses - This is a major red flag if they insist on stringent anti-dilution clauses. A clause that protects them if you sell shares at a lower price in future is fair. A clause that prevents them from being diluted even as your valuation increases is insane.
Small Business Background - 99% of “Angel” investors from a small business background and not a tech background don’t understand how tech investing works. They don’t understand owning 5% of a billion-dollar business because they and all their friends have fought to own 50%+ of a $10M+ business. Many of them will want valuations based on cashflows, not future cashflows; they will want you to be profitable, not grow. They don’t understand the type of business you want to run and will destroy your business (I have some experience with this).
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