I'm not sure I'm following how anyone can target the angel investors specifically? Aren't all common share holders have the same fate? So if they screw the common share holders, early employees will get the same treatment as the angels? (dilution for example impacts all share holders). I understand that key employees can receive extra shares along the way, but most probably don't in their first 4 years.
The way I've heard it is that later investors collude (descriptive, academic term, not value judgment) with founders via liquidation preferences, dilution, etc., and effectively wipe out all common shareholders (particularly employees) and all earlier rounds, and then give the founders some additional terms to compensate them specifically. How exactly that works, what they're giving the founders, and how this isn't hugely illegal are all details that I don't understand. I put a top-level comment asking exactly that.
That's exactly the approach. Seen many deals where the (remaining) founders get a big slice of new vesting options or reverse vesting shares as part of a recap or semi-distressed round.
Nothing illegal about it when the company needs the money, just one investor can write the terms they want, and the founders are on board with the plan.
I understand that, particularly in a down round, investors can push to get more. What I don't understand is what allows founders to get a side deal. It seems like that would go against fiduciary duty to common shareholders and earlier rounds.
Yea the founders also have majority common stock. So there's not a normal scenario where the founders and other investors get paid out in an exit, but the angels don't.
The bigger fear is a non-exit scenario, where the company becomes profitable, possibly pays out large investors to maintain the relationship, and founders just take massive salaries. So no liquidation event that benefits angel investors.
