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The other ‘angel investing’ problem

In the movies, angels are often omniscient. In real life, angel investors rarely know what is going on with their portfolio companies.

It’s not that these individuals are ‘dumb money.’ It’s that they’re ignorant money, intentionally denied financial and strategic information that would help them better track their own investments.

I bring this up in light of an interesting article by Mike Isaac in the NY Times about the explosive growth of angel investing, and the potential downsides it can present for startups that accept too many $10,000 checks from individuals. It details how each new check is accompanied by opinions, on everything from hiring to product development, but that a lot of the advice disappears if things turn south (i.e., when a young CEO could actually use the help). Ownership, it turns out, can be a one-way street when you’ve only got 0.001% of a startup’s shares.

While Mike is right to focus on the difficulties of founders who take on too many angels, it is worth noting that the lack of accountability may be tied as much to the lack of information as it is to the lack of stock.

To be clear, this is usually intentional. Many angel investors sign original term sheets that deny them information rights, based on the small size of their investment. Others get information for a while, but then stop getting it once a company becomes more successful — either via a board-approved change in share terms or through a CEO who bets that “founder-friendly” angels won’t risk a public rights assertion battle with a popular entrepreneur. Sometimes this second scenario is rooted in arrogance, and sometimes in legitimate fear of media leaks (or, most often, both).

I’m not sure that there is a perfect fix for the angel/founder relationship, but do think that it’s usually better to err on the side of greater transparency with your own investors. Not only because they took a risk, but because more knowledge should help increase both a sense of ownership and the quality of advice (in good times and bad). But, for that sort of shift, we may need to wait for the next cycle to play out…

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