Private Angel Investing Philosophies

I was watching a video from the 2012 Mass Challenge Accelerator where Venture Capitalist and Author Jeff Bussgang was explaining how to master the VC game (Video Here) [1]." _srfdn_>masschallenge.org/video/view/mastering-vc-game-jeff-bussgang}.  Overall it is a great video for those wanting to understand venture capital and how the VC-entrepreneur relationship works.  At one point, an audience member (44:00) asks a question about how VC’s perceive founders who have a family, a job, and therefore a primary responsibility outside of themselves or the investor.  He rightly replies and provides the “tough answer” that the founder won’t be seen to be full time and have sufficient skin in the game (“all in”) and that it is a negative-investment signal to the VC.

Now, I haven’t been an angel investor for very long, and the number of deals is small so far, but I wanted to set down some philosophies that I believe are worth sticking to, and for others to follow.

The first is the whole “Skin in the game”, “All in” mentality that investors want to subscribe to and invest in.  Nikita and I actually had an pretty big argument about this with respect to the “fair compensation” of employees.  Nikita, who runs FairSetup rightly then questioned “what is ‘fair compensation’”?  Personally, I define it partly as ‘market value’, and also the line where crossing it means the employee or founder is sacrificing those things that aren’t theirs to sacrifice.  Usually this is coming out of “free time”, which is actually “family time”, or “taking take of parents/children/others” responsibility time.  Even though this time is thought of as “free” by investors and employers (IE), and the use of it towards an IE desired goal is seen as a positive signal about the person’s commitment.

It should be seen as a negative signal.

Both from the Founder’s perspective, and from the Investor’s perspective.  Effectively the investor is stealing from the Founder and the Founder’s family, taking time and resources from the Founder that belong to someone else. From the investor’s perspective, the Founder is not a responsible party.  Even though on the surface, the goals of the investor and founder appear to be aligned (around the company’s success), in fact they are not; the founder is showing him/herself to be unable & unwilling to satisfy “higher” responsibilities to which they are already committed.  This mentality can only bite the investor in the ass, just as the from the founder’s perspective, you can do nothing else but come to resent the investor for demanding that you give up family/children/other responsibility time.

After running my own startup, it is my belief that a company cannot be considered profitable until  it is compensating its employees fairly, and it does not have a viable business model for the length of time that requires employees (and founders) to defer compensation from their fair salary, without an equivalent buy into equity (that the investors are making).  In point of fact, the buy in that the employees make is significantly higher than that which investors do.  It is a higher proportion of their net worth, the time sacrifice has more value to others because they cannot be nominally replaced, and they are (generally) not accredited investors.  Therefore, the startup, and investor who sees himself as a partner in the upside, have a fiduciary responsibility to compensate equitably.

It is impossible to equitably compensate for the founders’ or employees’ time which belongs to family and children.  That time is an even higher proportion of the childrens’ net worths, and they (children) are certainly not accredited, nor will they likely see the upside.

In short, the investing strategy needs to change from focusing on “skin in the game” founders to fair compensation business strategies & models.  If the business model requires all-nights and weekends from the staff and you do not want the founder to take a salary in addition to the infrastructure and employee cost, then you should not be investing, and the business model needs work.