- The focus of the video is on how to be a good angel investor
- Reputation is important in startup investing, unlike in public markets
- Having a good reputation helps in getting access to the best deals and prices
- Being helpful and improving the success of startups increases your reputation and deal flow
- There are four stages where you can demonstrate your value as an investor: before making the investment, during negotiations, closing the deal, and maintaining an ongoing relationship with the company
- Sourcing deals well involves finding good places to locate investments and respecting the time and boundaries of founders

- When meeting with a founder, keep it to half an hour unless the relationship is good
- If meeting for coffee or a meal, the investor should pay
- Understand that founders may not have all the answers and don't push too hard for information
- Focus on the person you're speaking to and give them your time
- Understand the terms of the investment and don't make excessive demands
- Negotiate in good faith and avoid groupthink when making investment decisions
- Keep your word and don't break agreements
- Once negotiations are finished, promptly sign the documents and send the wire transfer
- Bring in other investors if the founder agrees and get out of the way once the investment is made
- Avoid overwhelming the founder with unnecessary feedback or requests.

- It is advised to wait for the founder to reach out and ask for help rather than offering unsolicited assistance.
- One investor quickly sends wires from his jet after meeting with founders at demo day, while another investor commits to investing but later reveals that his fund hasn't closed yet.
- Founders who send monthly updates tend to outperform those who disappear for months at a time.
- It is important for investors to understand the difference between private and proprietary information and to respect the founder's wishes regarding sharing certain information.
- Investors should offer help and advice when they can, but also know their limits and not try to make decisions for the CEO or influence the board without appropriate circumstances.
- Pro-rata rights can be a point of contention between early stage and later stage investors and founders.

- Pressure on founders often comes from middlemen rather than direct instructions from investors
- It is important for founders to be firm in negotiating for what was agreed upon
- "Good" investors can be both smart and dumb money, as long as they are helpful and honest
- The size or fame of an investor does not determine their effectiveness
- Seed stage companies typically do not have external board members, but this may change as the company grows
- Investor updates should include revenue, growth, burn, cash balance, and challenges
- Reputation systems are not perfect, but word usually gets around about bad investors
- Losing pro-rata rights can be challenging, but it is important to know when and how to fight for them
- Founders should not jeopardize their reputation or the company's chances for a deal over pro-rata rights.

- The speaker emphasizes the importance of not ruining one's reputation or the chance of a startup getting a deal when it comes to prorated investments.
- The YC safe offers contractual pro-rata in all rounds except the converting round, and if a founder takes that away, it should be discussed.
- It is not common for founders to be aware of pro-rata agreements being taken away, and if they were aware, they would usually protect their angels.
- It is important for founders to plan ahead and understand the implications of agreements, as this can prevent them from going back and trying to change things.
- It is reasonable to ask for pro-rata in a side letter, even if the standard safe is being used, and it is important to know the terms and leverage during negotiation.
- Reputation can come into conflict when a founder asks for a recommendation to an investor, and it is important to be honest and only recommend companies that have been invested in.
- When founders communicate their cap table to investors, it is normal for investors to ask for it, and it is fine for founders to show it. Due diligence for early-stage investors is limited, and it is more important to focus on the equity splits rather than founder agreements.

The video focuses on being a good angel investor and highlights the importance of reputation in startup investing. It emphasizes the value of being helpful and improving the success of startups to increase reputation and deal flow. The video discusses the four stages where investors can demonstrate their value and offers advice on sourcing deals, meeting with founders, negotiating, and maintaining relationships. It also addresses the importance of respecting boundaries, understanding investment terms, keeping commitments, and avoiding overwhelming founders with unnecessary feedback. The video touches on various topics such as pro-rata rights, investor updates, and the significance of reputation in the investment process.

Startup Investor School is a free, 4-day course designed to educate early stage investors interested in investing in startups. We'll cover the fundamentals of investing, from investing instruments to legal and accounting basics to evaluating startups and managing deal flow. Our hope is that more people, from a wide range of backgrounds will consider investing in startups and that those who do will be better at it.

Learn more at https://investor.startupschool.org/

As we're concluding our course in startup investing, we're gonna focus on probably the most important aspect of being a great angel investor, and that's how to be good.

Interestingly it's not a neutral question.

It's the most important question that you're going to have to ask yourself as you have decisions to make as you do investments and things happen.

Things always happen, sometimes not great things.

And you have to decide how you're going to act.

My good friend and partner, Aaron Harris, is going to walk us through what it means to be a good investor.

He has been an investor himself many times, and he's been a YC partner for 5 years now.

So he has seen thousands of companies like the rest of us.

Aaron, you should note as you listen to him, has said that experts are generally right until they're wrong.

Thankfully, I don't consider myself an expert in much.

I don't know if that means I'm right more or wrong more.

So when Jeff and I talked about this idea of doing a session on how to be a good investor.

I thought about it for a while and realized there's actually a definitional challenge here in questioning what the word good actually means in the context of being an investor.

You think of good investors, you think of people who make lots and lots of money.

That's what we expect when we hear someone is a good investor.

But in startups particularly, there's another definition that I'd argue is actually more important than just generating returns.

Now, it seems a little strange that reputation is something we think about.

Because when we think about investing, we tend to think about money, because you give money to generate returns.

But reputation actually drives your returns when it comes to investing in startups.

In public markets, it doesn't matter who you are.

This is why a lot of hedge fund bosses are assholes.

They make lots and lots of money no matter what they do.

And so you hear ridiculous stories about the things that they do and the way that they mistreat people.

I know a little bit about this because I worked on Wall Street for 4 years.

And I can tell you that inside of a standard investment bank where many of my friends worked and where I worked, we never really thought of the people we worked for as people we liked or wanted to hang out with.

They were simply good at doing deals and making money.

And the same is true across the hedge fund world, but it's not true when it comes to startups.

And that's because this isn't an open market and the supply and demand of investors to good startups aren't matched in an open exchange.

There is nowhere where you can go and buy access at your discretion in any startup that comes out of YC.

Now obviously this is changing a little bit when it comes to ICOs, but even in ICOs, if you want to get in on the pre-sale or the pre-pre-sale or the pre-pre-pre-pre-pre-pre-sale, you're going to have to know someone.

And I've watched the way these networks have developed even in that space, and what you see happening is people with good reputations get the best prices and get in on the best and most oversubscribed deals.

This is particularly true for hot companies, for the good startups, the great startups.

This is a little tricky because as people have talked about this week, you don't really know who the good ones are ahead of time.

And often a rush of investors towards a startup is a contraindicator of that startup's long-term success.

However, you have to go with what you can see at any given point in time.

And if there is a deal that you want to get into, you need to find ways to advantage yourself to get into that deal.

And that's why you need your advantage when it comes to investing in companies.

And I think that that advantage is primarily a function of how good your reputation is.

Being good is directly correlated to your deal flow.

So let's say you get your first investment.

What's your job with that investment as an angel?

Well, because again, these aren't massive public companies that are immune to your help, your goal as an angel investor is to improve the likelihood of that startup's success.

Can you help that company be really, really, really good?

If you can do this, if you can help companies do better, the founders will talk about you.

There just aren't that many founders in the world who are completely unnetworked to other founders.

So if there is a rumor out there that you're really helpful, then you'll get more deals.

And if you get more deals, then you'll have more opportunities to help companies succeed.

And if you help companies, more companies succeed, then you'll see more deals.

As you do this more, you get better at it and more companies talk about you.

If you screw this pattern up, if you're seen as someone who hurts the companies, then your deal flow will dry up.

I know this very, very well, because I had investors who were not very good to me, who did things that I would consider to be bad.

They don't get many invitations to demo day.

I think Elad said yesterday that there was an investor who tried to screw him on his acquisition or his sale of his company.

And Jeff, was his quote, I'll never fucking work with him again?

This thing reinforces on itself in either direction.

So if you want to do this thing, if you want to be good, if you want to increase the likelihood of success of companies and get more deals, how do you do it?

In my mind, there are 4 places at which you have the opportunity to demonstrate that you are good to a founder through an investment.

And those 4 stages are before you make the investment, which is in sourcing your deals, during, when you're meeting the founders for the first time and negotiating the terms of your investment, as you transition from being a pursuer to an actual investor or from an investor into a shareholder, which is closing the deal.

And then after the deal is closed, which is your ongoing relationship with the company.

At each of these places, you have the opportunity to become helpful and to become good.

It's important to find out good places to locate investments.

We'll bring out about 150 companies all in 1 day.

You can do all of your sourcing for 6 months at 1 Demo Day.

But you know that you wanna try to get an edge in that relationship.

And so what a lot of people do is they'll start emailing founders.

They'll find a founder who knows a founder who knows a founder who knows a founder whose brother heard that a founder was in YC and they'll email that person.

And maybe that founder won't respond because they're busy.

They can either A, respect the founder's decision that they don't want to talk right now and politely email back and say, hey, I know you're busy.

Is it OK if I keep following up and find a time when you're not so busy to meet?

They can start stalking the founder and showing up at coffee shops.

They can drive around the circle here on Pioneer Way, hoping that a founder comes out of the building such that they can talk to them.

We've had investors literally hanging around outside the door in the hopes that they'll find some founder that they want to meet.

Not only is it creepy, it's unlikely to endear you to the founder in a way that will get you the deal that you want.

And this is weird, because you think, oh, I need to be persistent.

When the companies need capital, they tend to go looking for it.

If you do end up sourcing a deal and you make that first contact and you go and have a conversation with someone, there's some pretty easy etiquette rules when you meet with a founder.

The first is you need to respect their time.

Do not ask for a three-hour meeting for a new company.

If the founder says, yes, I can meet, keep it to half an hour.

If the relationship is good, if things are going well, then you can make it more than that.

If you go out for coffee or a meal, you pay.

My friend, Baba Moraka, who was 1 of my angel investors and has also been a professional investor for quite a while, gave me a great rule of thumb.

If an investor meets with a founder, the investor pays.

If 2 investors go out, whoever has the higher AUM pays.

I think it's a really great rule of thumb and I use it all the time.

And you should do this because it doesn't matter whether or not the founder is wealthy or poor.

It doesn't matter whether or not the founder owns the coffee shop you're in.

It doesn't matter if the founder bought really nice avocado toast and all you got was a cup of tea.

You are trying to be good to this founder and show that you want to help them.

And if you're discussing the idea of giving that founder 05:10, 15, a hundred thousand dollars, what the hell is the price of coffee?

Go the extra distance to show that you want to help that founder.

They will remember it and they'll tell stories about you if you don't.

Right, so in that meeting, when you're talking to them, as that conversation develops, you're gonna ask questions.

And they're gonna have the answers to some of the questions and they're not going to have the answers to other questions.

In all likelihood, it's a brand new company that doesn't know all the answers.

And if you expect them to know everything, you will be sorely disappointed.

And if a founder says no to a question, or says I don't know, it's okay to ask once or twice in slightly different ways to see if you can get the information, but don't ask 15 times.

This is a way to certainly annoy the founder and probably push on something that they might wish they knew but might be completely irrelevant.

When you're speaking to that founder, focus on the founder.

This is really hard to do in something like a cocktail hour after demo day, where there's all these other founders going around.

Any of them might be starting a multi-billion dollar company, and so what you do is you're talking to someone, you're talking, you're talking, who's that over there?

And you sort of start walking away as the person's talking to you.

This is just basic human conversation stuff, which people often get wrong.

Give them your time, because they might be an incredible founder and you might want to get into the deal.

And they will remember if you were a jerk to them.

Now, when you're discussing what it is you want to invest.

Understand what you're asking for, what it means, and what's OK.

1 of the challenges here is that a lot of this stuff is pretty opaque, which is why we're doing investor school.

We're talking about what each of the terms in a safe means, what a cap is, what a liquidation preference is.

By the way, don't ask for those in angel investments.

I saw an investor just last week agree to terms with a founder, a standard safe.

They were going through the motions, okay, sending back and forth, oh, we send you the safe, okay, great, great, great.

And then the investor sent back an email, hey, just 1 last thing, and listed 10 demands, including a board seat, 2X participating preferred, drag along rights, right to block a sale.

And the founder came to me and said, what do we do?

We had an agreement for all this money, what should we do?

There are other investors out there and this is a bad investor.

And enter it and tell your friends, right?

It's pretty open secret that YC has an investor database.

This information goes into the investor database.

And those investors don't get a lot of deal flow afterwards.

When you're in this negotiation, it is natural for 1 side to have more leverage than the other.

Understand where the balance of leverage is, use it wisely, and don't push it too far.

This is something that will come up again and again in your relationships with founders.

There are always unexplored pockets of alpha, probably, that you could get if you pushed beyond what seems appropriate.

It seems like the right decision in the micro.

It's the wrong long-term decision because you're trying to do more than 1 deal over time.

And it is unlikely that any small thing you do, that a tiny, tiny bit more ownership that you get in 1 deal is going to be the difference between greatness and badness over the arc of your career as an angel investor.

If you say you're going to do something, do it.

And if you are negotiating with someone, do it with the intention that you're actually negotiating for a reason.

1 of the worst things that investors do, and we tell all of our founders about this, is to avoid investors who are negotiating to the point where they can find out if other people are investing.

They'll say, oh, yeah, yeah, no, I want to invest, and then this term and this term, oh, who else is investing?

And they will only make a decision if they see a lot of other investors have come in.

1, groupthink usually leads to bad decisions.

And 2, as I've seen again and again over the last few years, some of the best companies that have come out of YC's demo day have been the ones that didn't attract all of the investor interest.

And it's the investors who think differently and go against the curve and find the things that they genuinely find interesting regardless of what other people do.

They find not only companies that are gonna do incredibly well, they get in at better prices and they get more ownership.

I look back and I say, oh wow, those guys are a lot smarter than I thought.

It's a lot like this other deal that you did.

Other people are not smart enough to look at this, but you are.

That's great, that's the position you wanna be.

And finally, when you do finish a negotiation, and you do agree to something, I don't care if it's a handshake, I don't care if it's verbal, I don't care if it's in an email or a contract, your word is your bond.

This is something we drill into our founders.

If you agree to something, that agreement is final.

I understand that there can be circumstances in which something wasn't revealed, which there's material new information that changes the agreement.

That's okay, but do not break a handshake.

Everyone will know, It will not stay secret.

And people will understand that you are not someone to be trusted.

And you're trying to start a trusted relationship.

Say to the founder, great, can you send me docs?

If the founder is slow in sending you docs, follow up and say, hey, can you send me those docs?

You are a shareholder now, or you should be.

Get the docs signed, and as soon as you sign them, send the wire.

Use HelloSign or Clerky or whatever you're using.

Sign and immediately open your Goldman Sachs wealth management account, or call your guy at Smith Barney.

And get them to wire the money to the account as soon as possible.

And as soon as you do, call all your friends who also are trying to figure out where to put money and get them in on the deal.

Bring a coalition, bring a syndicate with you, bring really helpful investors as the founder needs.

So say, hey Aaron, thanks for letting me put $25,000 in.

I know you guys are trying to raise a half million more.

I have 5 people who I worked with or who I know who are awesome for your business for this reason, this reason, and this reason.

They typically invest $25,000 or $50,000 a piece.

Can I get them in?" And if The founder says yes, immediately send the emails, make the phone calls, and bring those people in?

And this is the reverse of saying, hey, let me invest, and I'll figure out money later.

I promise I'll find you some other people, but I'm not going to invest until they come in.

You invest first, you lead, and then bring the other people in.

That's a great way to set off your relationship on a good foot.

There's this thing that investors wanna do during a fundraising process where they've invested, they now feel as if they are the CEO.

This is particularly difficult for people who have been CEOs or have run groups.

Also, the way that you wrote this thing on your website is bad.

And these emails are incredibly frustrating because the founder is trying to close the round and get back to work and now you're distracting them with all these things.

My partner Dalton refers to this kind of investor as a human DNS attack, where they just like overload you with all these requests.

And you can't do anything anymore because your email is just filled with all these requests and all these things and all these orders.

Sit back and wait for the founder to reach out to you and get to the point where you can start helping.

Because then, oh, actually, sorry, 2 quick stories, because I think this is pretty awesome.

The best transition from kind of wants to invest to shareholder that I have seen.

There's an investor that comes to demo day who meets with founders, does a handshake on the floor, leaves like within 5 minutes of demo day ending, and then literally sends wires from his jet as he flies home, that night.

And for a while we thought this wasn't really happening, we didn't understand that this investor was legit.

And then a couple of our companies said, ah, so this is gonna sound weird, but we sent this guy a safe.

But then we got the wire, and we tried to respond.

And his assistant said, sorry, he's in flight.

He's following all the advice about closing quickly.

The opposite is an investor I know of who committed to investing in a company, worked really, really hard.

I think it was a half million dollar check or something like that.

I'm gonna be so good for you and for everything.

And then, you know, he signed the docs and then the founder said, hey, where's the wire?

A week later, The investor got back, said, oh, I'm so sorry about that wire.

And the founder said, no, that's ridiculous.

So the investor tried this, said, okay, hey, I'm sending you a check in the mail.

Just hold it there for, I just need a couple weeks.

Wow, this is terrible for so many reasons.

1, never commit to invest money you don't have.

2, this person convinced the founder that they had the money to invest.

The founder stopped talking to some of the other investors that were interested, so didn't get the money from the investors that were interested, is now waiting on money that doesn't exist and can't really necessarily go back to those original angels that were interested because they're in this weird legal limbo where they signed the thing and now they don't have the money.

If you start making promises that you literally can't cash, that's a really good way to destroy your reputation.

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Aaron Harris - Startup Investor School Day 4