Do Angels And VC Look Favourably On Prospective Investees Where Protected Equity Holdings Exist


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as a means to enable investment of non fiscal resources across a wide range of disciplines into early stage enterprises we have devised a protected equity model that sees 'sweat equity investors' having their equity protected via irrevocable clauses in their shareholder terms.

To be precise it means that the protected equity block cannot be diluted until the founders equity stake has been diluted to either 10% or 5% of the total.

With the aim of many of these companies being to raise further funding from either or both angel investors and VCs, the question is what is the general view/opinion of these parties with respect to investment in enterprises with this type of equity structure?

Funding Equity Angel Investment

asked Nov 1 '13 at 00:33
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Emile Emiabata
1 point

1 Answer


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Well without knowing more info and studying the actual agreements there is no way to tell for sure.

However I can tell you 100% that if there is a way that upon exit the investors get their return after the founders that won't fly too well. Mainly this is due to the fact that majority of startups they invest in statistically will fail, their only recourse at that point is liquidation of assets, at which point they always get priority.

To put this in an example, imagine the following scenario:

A startup has a $1m seed investment from ABC Company

The founders have a 10% share protected share, a say 50% common equity share, and the investors hold 40%. This means that at liquidation, the assets will be distributed 80/20. Since investors normally get proffered shares.

Under this scenario the company must have assets worth $1.25m in order for the investors to recover their share. That $250k may not seem much, but it is.

Now the likely thing is, the assets will be worth much much less, meaning as it is the investors are taking a loss, with your model they will recover 20% less, increasing their risk.

This would not be a smart investment to most people, unless they are investing in the next facebook or something, but the chances of that being seen especially in seed and series A is highly unlikely.

You have to remember who is taking the most risk, and who it is more worthwhile for. Investors see thousands of startups a year, and honestly most time they subconciously look for things to say NO, so give them as little as possible

answered Nov 1 '13 at 01:17
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User60812
820 points

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