How to manage your angels (better)

My good friend and mentor Rahat Ahmed at Anchorless, which is doing amazing things in building a bridge between startups in Bangladesh and international capital, was discussing some of the traits and habits of angel investors that are limiting the growth of our nascent ecosystem in Bangladesh. 

I fully echo many of his points. 

For example, I've seen first hand, founders being diluted to a fraction of their business and trying to raise capital and not being able to, because at that point they are a subsidiary of someone else's company or conglomerate, rather than their own stand-alone one. The founder is really no longer the founder, but an employee with shares. 

I've seen investors place terms that make the company unfundable in next rounds, including "ratchets'' that mean they are being able to keep their shareholding without the requisite follow-on investments in future rounds. 

Some investors expect companies to move to their offices, to keep a close eye, and charge for that as an in-kind investment. Under such close supervision, the founders' time and the company culture, as well as shareholding, get diluted. Of course, sometimes this may be a win-win if the investor has spare offices and the company needs office space at a low-cost. 

Rahat is coming out with an article that goes deeper into many of these points and I encourage you to follow his channels when it gets published.

What I wanted to talk about is the other side of the coin. What are the (not so) best practices of founders when it comes to raising investment and managing investors?

1: Play investors against each other

Founders may promise *slightly* different offers and valuations to different investors to close a round. That is fine. Different investors' time, money and reputation will have different values based on their expertise and demands on those resources. But I've seen founders not keeping all investors in the loop on these differing terms and conditions, which came to a head when filing paperwork and collecting signatures. 

This includes shareholding agreements, where all investors must sign with an understanding of the terms and conditions under which different classes of investors are coming on and how the company will be governed. 

One aggrieved investor can easily ruin the dynamic of the entire shareholding group. Transparency is the best policy, and if an investor has a problem, maybe they're not worth taking on.

Founders also need to know that this is still a small community that is actively investing in Bangladeshi startups in the early stage. Saying one investor has promised something, in order to pressure another group of investors to match, might be ok if that is actually true. It's not hard for investors to talk to one another, and they often do, to compare notes.

2: Set arbitrary deadlines with unreasonable ramp-ups in valuations

I fully appreciate what a slog it can be to raise capital in Bangladesh sometimes. I also know that for many entrepreneurs, their plans are on hold until they raise funding. It is also ok to put a marker for a deal close (including term sheets and any share advance) and communicate that with prospective investors. 

But what I don't appreciate is saying that a deal must close within a couple of weeks (quite unreasonable, if an investor has just met the company) and if it is not closed, there is a ramp up in valuations by 50%, 100%, etc. I've seen founders do this, and I will tell you, it immediately sours investors from investing in those founders because of their lack of maturity. 

I think 2–3 months is reasonable to close an angel investment round with multiple investors, provided sufficient due diligence is done and there is significant momentum, including a syndicate that emerges, often with a lead. Of course, there should be deadlines and targets throughout, and mismanaging the process can lead to desperation on the part of founders and lost leverage.

3: Expecting significant bump-up in valuations without the related growth

Let's say a company has raised money from angels in the last few months. Excellent. It has used that money to build out the product and gain traction. Even better. But unless the company has had exponential progress that can be quantified, it is very hard to justify bump-ups in both investment tickets and valuations by 2–3x in 2–3 months. 

Of course, the flip side is that the incoming angels should respect the risk taken by earlier angels and give a premium, provided there is execution to merit this. I think in reality, a company could try to raise 2–3x the capital at a 30–50% bump in valuations, provided there are significant milestones that the company has met over the previous 2–3 quarters in terms of product, user metrics and revenue, or preferably all of the above. 

Of course, there are only thumb rules and can be upended based on the company, the founder(s) and how desperate investors are to get in (or not).

4: Obsessing over secrecy

Most ideas are not new. Execution is everything. And a company, and the hard work that founders put in, cannot be replicated through someone getting their hands on a presentation, or even a P&L (profit and loss statement). And the more secretive founders are with prospective investors, the harder it is for them to raise capital, as investors will get more uncomfortable when pressed to invest.

5: Getting annoyed with compliance

It is totally understandable that early stage companies will not have all their compliance in order, including audited financials, tax, government and copyright filings, ironclad employment agreements with non-solicitation clauses, detailed founders' agreements with lock-ups and vesting arrangements, etc. Part of due diligence is to uncover these holes and to make sure there is a plan to correct them, post investment, unless something is truly material and could potentially place undue risk on the company's very existence, in which case it must be resolved pre-investment. 

We also understand that founders are under enormous pressure just to keep the lights on, and compliance sometimes is a moot point when there is uncertainty of the company being a going concern. But it is necessary, and the longer these issues are brushed aside, the higher likelihood that both investors and founders will pay a price in future rounds and at the exit stage for non-compliance. 

Founders should also be proactively keeping a data room with relevant documents in order to minimise the time to collate them.

6: High minimum tickets and making them deal-breakers

It would be great to get one or two large investors who can cut $100K plus checks. But keep in mind, the higher the minimum ticket, the fewer options there are for potential investors and the longer it may take to convince them. 

Those cutting $200–500K plus checks right now in Bangladesh are mostly conglomerates or groups of companies, though financial institutions are getting into the game. They have multiple layers of decision-making, at the promoter family level, at the directors' level and at the C-Suite level. 

There are many investors who can bring significant value cutting checks of $10-$50K, especially if they can be bundled together, through a platform like BAN. Of course, founders may want them to maximise their checks, especially in order to keep the cap table clean, but they also have to respect the fact that investors need to diversify their exposure across a portfolio of startups, knowing that at least 50% will fail, 20–30% may return capital and 10–20% will be the rock stars who will make most of the returns on their overall investment in startups. 

Founders will be rightfully convinced their company is the outlier in this curve. Any founder who does not believe this will cause concern, because self-belief is absolutely one of the most important ingredients. But investors have to invest knowing they might be the 50% that fail and diversify accordingly.

7: Awarding shares to random people who are not in the company

I always find myself scratching my head when a spouse or parent is in the cap table of a company, if they are not working for the said company. They will come to an investors meeting, and contribute very little. 

Every share has value, either to be sold to an investor or given to an employee or advisor who has brought corresponding value to the company. Professional investors also find it uncomfortable having discussions about and sharing cap table space in the company with people who are actually not involved in the company and may not be qualified. 

To a lesser extent, this can also include various "advisors" and entrepreneurship development programs such as incubators and accelerators that may take a huge chunk of equity without financial investment or on-going support. Founders Institute has a great framework for awarding advisory shares. 

In my view, the threshold for awarding advisory shares should be 3–5x higher than financial shares (e.g. the quantifiable value said person or organisation is bringing), subject to KPIs and vested over a period of time rather than upfront.

8: Keeping investors in the dark

At Bangladesh Angels, our minimum expectation is a monthly update of progress on key parameters (product, partnerships, team/operations, revenue/customer/user milestones), along with a quarterly call for investors with more detailed P&L numbers. It doesn't have to be just for BAN — it should be for everyone on the cap table. 

A founder who chooses to limit communications is opening themselves up to conflict with investors in the future, which can come back to bite them in a big way if they need to raise money from that same pool, which many had to do during these times of Covid-19. 

Not only that, part of good stakeholder management is proactively asking investors for help, whether it is an introduction to potential customers, visibility to new users or any other issue that that particular investor can help in, including technical issues. 

I'm wary of investors who expect to play a part-time role in the venture with a minimal commitment of capital. If they want to be a co-founder, they should be upfront about that and bring significant value in terms of time, money and expertise. But most investors just want to be informed and help where they can. Companies should take full advantage and make their investors work for them.

9: Making material decisions without investor input

In the day-to-day grind of running a venture, it is totally reasonable and expected for founders to cut deals and conclude transactions of varying values and degrees of risk. Some companies will explicitly outline it in their shareholding agreement, which will say that a board decision must be made for founders to conduct transactions above a certain amount. 

Founders should also respect that although they may own a majority or supermajority of shares, their investors are partners in the venture and deserve to be kept updated on potential liabilities. Examples I've come across include a B2B contract that is quite large and requires a large outlay of expenditures with a long lead time to convert to cash, or a partnership with another company where the IP of the output remains with the partner rather than the company or a key C-suite hiring decision with expectations of shares. These are some just of the material and/or strategic decisions that may alter the financial health and long-term course of the company. 

The decisions are ultimately the founders', but they should use the significant experience and knowledge base of their investors to identify the best possible outcomes, and if need be, bring them to the negotiation table and have them fight for their company.

10: Not being in raising mode all the time

In a country and ecosystem where capital is still scarce (though this is changing rapidly), it might be a fatal mistake to repeatedly refuse investment from prospective investors because a company is "in between rounds" and does not want to raise at the last valuation for fear of dilution and does not think they can get the significant premium of a hypothetical future round. 

Of course, there may be reasons to refuse investment, including a mismatch in expectations, the investor-company fit, a huge gulf in valuations, etc. But assuming those are dealt with, a company should be raising all the time, including talking to investors and closing said investors. 

Even if documents are filed, new investors can sign addendums. This includes investors who may have passed on previous rounds — keep them updated in a monthly newsletter and create FOMO (Fear of Missing Out).

These are some of my observations, but I know this is only the tip of the iceberg. Investors: What are some mistakes you've seen founders commit in managing investments? Founders: What pitfalls have you encountered in this process? Keen to hear your thoughts.

Nirjhor Rahman is the CEO of Bangladesh Angels Network.