August 18, 2010 by dan.

Over the last several weeks, I have had a series of experiences where boards have not represented the interests of shareholders. Why? Kindly, you would say inexperience or lack of knowledge. Less kindly – incompetence. Or even less kindly – greed.

In one case, the board, without any form of communication about the company’s status or consultation to the vast majority of shareholders, in short order (1) forced a “pay-to-play round” led by two institutional investors; (b) granted the CEO and other senior managers a HUGE carve out (despite several years of missed targets and poor performance); and (c) negotiated a quick sale of the company where the winners were the management (who got the carve out and a bonus from the acquiring company) and the institutions that forced the pay to play. This was done by a board that was incredibly conflicted, but counted on the fact that the angel investors in the deal (there were about 30 of us) wouldn’t take any action. Payout to the angel shareowners - $0. That’s right – nothing. This is egregious, but not uncommon.

Angels need to be willing to take better actions to protect their investments.

1. We must be willing to band together. I am working with several attorneys and the Alliance of Angels to create an LLC that can be used to aggregate our investments in a company. In this way, we will in aggregate be a “major shareholder” in the startup and get rights and privileges commensurate with a VC. This will add a small expense to our investing and require some overhead, but it should be worthwhile. And the company should love this, since this will be one shareholder instead of many.
2. We need to insist on a board seat and assign one of our members with sufficient experience to take that seat.
3. We must insist that our CEOs communicate, communicate, communicate. I get frustrated with a CEO that has bad news and decides not to share it until there is good news. Often the only communication is one from the law firm representing the startup and usually that is really bad news. Funny how the CEO was quite communicative while raising money from us. Boards need to step up and make sure that their CEOs treat their investors with the respect that they have earned by investing in the company.
4. Boards must represent shareholders in holding management accountable. I’m not saying be obnoxious. But, if you hired a contractor to fix your house and they didn’t do the work they contracted for, you wouldn’t pay them the full amount. Why do boards feel it is OK for a team to miss on their execution and then reward them? Boards need to step up.
5. Carve outs need to be measured. I understand that an acquisition can only occur with a willing management team (and a willing board). If there is a large liquidation preference overhang, (as there often is) management’s stock might all be under water. There is a need to take action to make sure that rewards are balanced. Boards need to be proactive in this. I will be posting a separate blog on my assessment of best practices on this.

So.. investors need to insist that board really do represent them and not allow them to take the easy way out, create conflicts of interest, or have investors take it on the chin. Boards – step up!

Posted in Startups, Company behavior, Rip-offs, Boards, Investment Terms, Alliance of Angels, Angel Investing | No Comments »

March 16, 2010 by dan.

In a previous posting/rant, I talked about Angel Groups that gouge entrepreneurs (http://blog.drosenassoc.com/?p=13). Some charge over $10,000 for the right to present and that steams me. However, I have not directed my wrath at another group that gouges entrepreneurs even more – brokers and small investment bankers. Note to entrepreneurs: Do Not Use a Broker (or small investment bank)!

Such firms typically charge an entrepreneur between 5-10% of the amount raised, in addition to expenses, legal fees, and a retainer. No angel I know wants to see the money they invest in a startup flow out the back door in this way. You do not need to pay to find angels and get them to invest in your company. If you have a good idea and a good business, approach us directly. The staff at the Alliance of Angels gives you far better feedback, based on angels who actually invest, than you will get from a broker. And it’s free!

The Northwest Entrepreneur Network (NWEN) and Washington Technology Industry Alliance (WTIA) offer seminars, networking events, and classes on how to raise money. They are low cost and valuable.

But.. no angel I know likes deals where there are brokers involved. We like to meet with and get to know the entrepreneur, help them get their company going, and build to a success. None of want or need someone in the middle.

Posted in Rip-offs, Alliance of Angels, Investment Terms, Angel Investing, Investments | 1 Comment »