Angel investment exit advice

by throwawayrandomvowel. Posted on Sep 16, 2020    17    19


Hello,

I made an angel investment that worked out great, despite putting in really no thought or effort. Since I was never particularly diligent about this investment in the first place, i need some advice!

Background

I was investor #1 for a small startup about 3 years ago, with a SAFE at valuation cap of $1M and an 80% discount rate. The company is now being acquired, so the liquidity event is at hand.

I invested partially because I wanted to make money and was confident in the founder, but I also had non-monetary incentive. As a startup founder myself, I wanted to sit on the other side of the table, ignorant as i was/am, so I my experience as an investor would be helpful when i started seeking investors myself. As it turns out, I had a good experience and made some money.

Question

I need help determining how to evaluate my decision to take my money and run, or roll over into the acquiring company. I know no one can tell me which choice is better except myself, so i am looking for help in how to evaluate this decision.

TBH, i am pretty uninformed about all this stuff. I know i can read about it, and it is my personal responsibility to do so, but it still gets me confused. For example, this quora post is helpful.

Context

I am tempted to roll over my assets into the new company, because they are about to raise a series B. As i understand, if i take my cash now, I get a 3.5x gross return (guaranteed). But given the discount rate, and the huge funding round the acquiring company seeks to execute, I might be able to see a 20x - 40x return (i think), given risk.

Deadlines

I am meeting with the acquiring company's CFO next week, and want to prepare for it, so it's not a huge waste of time for both of us.

Addnl

Please ask me to provide more information if it is needed.


Comments

whoisjg

Can you take your original investment off the table and roll the rest back in?

Techn1que

Five years from now, which would you regret more:

Losing 3.5x return to risk 30-30x...or missing out on a high risk high 30-40x reward?

blackedgetrader 1

if 40x was in the cards, this would be it. If it still is then the founders shouldn't sell, they should just raise another round and continue. The fact that they want to sell is telling. Cash out, buy some safe real estate with the initial and reinvest the rest in other angel oppertunities. Then just rinse and repeat. If you really really want that extra 10x from this deal, or just want to stay in the game, stay in with your initial only and take the rest of the table.

prsh_al 1

Hey mate, well done on your angel investment. You've made money, helped someone on their dreams and indirectly create jobs....much kudos.

In this circumstance, it is helpful to have more info but I would honestly say take the money.

​

  1. They aren't buying at a discount, they are buying at a market value that happens to be different from what you think the market value is
  2. If you own 10% of this startup and the acquirer is worth 10x the startup, you will only own 1% of the newco
  3. Would I be correct in assuming the acquiring value is $3.5m? If so, this is not a great valuation for 3 years work. The seed round of any start-up is always a partially false amount. It seems that the founder selling may be indicative of his long term thoughts.

    Take the money and invest in 2 seed rounds :)
Big_Cup 1

A couple of questions:

1) You said they are about to raise their Series B so why didn’t the SAFE convert at the Series A?Typically a SAFE converts at the “next equity financing”. This is usually the Series A as a company friendly SAFE usually defines a threshold amount for the conversion of the SAFE.

2) What does the SAFE say you can do during this pre-conversion acquisition? A well thought out SAFE typical states that you can either get your money back and maybe then some (which it sounds like with your guaranteed 3.5x return); or your SAFE converts at the valuation cap and you then get to participate in the buyout.

It really just depends on the SAFE and what it says. As a startup and venture capital attorney, I highly recommend you speak with an attorney who deals with these matters as they can advise you on how to proceed based on the SAFE you hold and the circumstances surrounding this acquisition.

Mobile_Trouble 1

I'd take the money.

MaxPast 1

Try to look at the choice from the opposite side: what if you had your money in cash, would you invest into the new company? If you refuse to sell, you agree to buy :)

fGravity_ 1

Just evaluate your risks, sometimes it’s better to make x3.5 then lose x40. Just don’t ever go back thinking how much money you COULD HAVE made, think how much money you did make.

Tho that’s just an advice, I’m not into investments myself

  throwawayrandomvowel 1

Hahah totally agreed. I'm smart enough to understand that much! That's why i'm asking.

kanzude 2

What about the old "take your initial investment back and play for casino money" strategy?

If you made 350% so far, pull your initial cash. That way worst case you break even. At the same time, you still have decent exposure to potential gains.

That's what I would probably do, that's what I think is smart.

Unless your initial investment is very small amount of money that you don't care about that much - then you can leave the whole thing in.

cocococopuffs 2

Rarely does it work like that unless it’s on the public market

Honest-Artichoke-203 3

First and foremost you have to create a distribution of possible outcomes if you stay with the deal.
- what is the percent chance the company is going to go bust?
- what is the percent chance for 20x return?
- and what is the percent chance for 10x return?
etc. etc.

You can get this data by looking at how many Series B companies fail altogether and how many succeed and to what extent. (then you can adjust this number based on the internals of this specific company)

Keep dilution in mind also when you do the calculation of returns. Your % is going to dilute with further rounds and you have to estimate how much.

Then you have 2 options.

OPTION 1:

  1. You can estimate the EMV (expected monetary value) for each outcome.

    This is how much money on average does each possible outcome make you if you were to do it many times. And that way you can compare all the possible outcomes including your current exit possibility by the EMV number.

    That's one way to look at it. :)

    ​

  2. Then the 2nd option is to just ask yourself...What do I prefer:


    A) 100% chance for $ (the money you get if you exit now)
    B) x% (say 18% or whatever the average number for success of the new company) chance for $Y (say 20x or the average profit IF this thing succeeds)

    Generally, you're likely to lose your money if you stay with the deal. (considering Series B outcomes)

    Unless your net worth is very very high I think it's better to take the money and leave.
graiz 5

You should look at is as a brand new investment.

Say you put in 25K and feel that your return is now 87K... Would you invest 87K in the go-forward company? You can also take some of your chips off the table, bank 50K so you have 2X return and let the rest roll.

It would depend mostly on the trailing 6 months of financials and revenue traction. If the company is de-risked and growing fast then it could be a good bet but if it's hemorrhaging cash and needing to raise rounds to stay afloat I may be more hesitant.

dozermanblues 1

@graiz is on the money.

Perceiving the acquiring company as a new investment is right. They are the new owners and the company’s direction from here on may be largely on their lead. Founders, strategy execution and growth. You’ll inherit all their upside and downside risk.

Also, importantly as angel investor, aside from what your returns MIGHT be, do you think there may be another exit opportunity?

waialuawanderer 16
  1. Talk to a lawyer to make sure you understand how your investment is being treated and to give proper guidance.

  2. The question comes down to whether or not you would invest in the acquiring company. You have to assess the situation if you were looking at a new deal. Are the business fundamentals strong? Is there a large market opportunity? Do you believe in the leadership? Are they executing properly? And, what is the share class and treatment of your new equity? Common stock or preferred pari passu with current investors...
mr1elee 2

This is the best and correct answer. Always seek professional guidance (lawyer and tax professional) with someone who makes it their job to advise on multiple deals to fully comprehend risk and learn from their experiences.

My guess is it isn't as black and white as sell or hold. I've seen multiple transactions throughout my career and I can safely say none of them are alike. There are always multiple options that a professional will uncover for you.

Cultural_Beyond8851 8

Talk to a tax attorney. A lot of people got screwed in the dot com bust when they decided to not sell their shares in a liquidity event only to watch the company tank. Even though their stocks were worthless, the owed taxes on the share price at the time of the liquidity event. A lot of people lost their houses as a result

  throwawayrandomvowel 4

Good point, didn't even consider that perspective. Thank you.