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F|R: 5 Reasons to Go All Angel à la Lookery

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This week, Lookery, the ad network launched last July to serve über-cheap ads into Facebook applications, has announced a new $2.25 million round of funding. It’s a nice sum for the 14-month-old startup, which now sends Facebook some 3 billion ads a month, according to Lookery’s CEO, Scott Rafer.

But here’s what’s really interesting: Rafer and his cofounder, David Cancel, elected to raise the money almost entirely from angels, forgoing the traditional venture capital most companies would pursue at this stage. This is Lookery’s second funding event. In January, it raised a $1 million note, which converts to equity given in this deal.

The participant list is heady, including founder Marc Benioff; Reed Hundt; Tickle founders James Currier and Stan Chudnovsky; and’s Scott Kurnit. There are some notable VCs in the deal, too, but they’re participating individually, not with their firms: Ted Dintersmith, late of Charles River Ventures; Ravi Mhatre of Lightspeed; and Allen Morgan, of the Mayfield Fund, who is also a Lookery director.

Serial founders with good track records, Rafer (MyBlogLog) and Cancel ( could have gone after marquee venture firms if they’d want to, but the pair has specific reasons for favoring angels. After the jump, Rafer explains why other founders ought to consider doing the same.

Lookery’s 5 Reasons to Go All Angel

1) Focus. Angels can concentrate on the individual strategy of your company, rather than the larger portfolio management strategy a VC must bear in mind (e.g. How deep are my fund reserves? How fast must I spend them?), most of which don’t apply to your company. “Founders want their startups managed as sovereign entities, not as portfolio segments, “ Rafer says.

2) Fewer confusing ownership terms.
Angels don’t get the level of liquidation preferences VCs demand. Angels like convertible notes and often get what Rafer calls “thin preferreds,” but you’re unlikely to suffer the dreaded participating preferreds. Without a multi-tiered equity structure, every investor, including founders, gets paid in proportion to what they put in.

3) You will control negotiations on future funding rounds.
You’re less likely to have a “dissonant chorus of voices between the common shareholders and preferred shareholders, each at the table and wrestling in a different direction” over the terms of the new round, Rafer says.

4) Transaction control.
If a good purchase offer comes your way, you’ll get to decide when to sell. You won’t have to seek permission from investors who aren’t on your board or worry about what a VC needs to have happen vis á vis managing his limited partners. Chances are you’re not an LP, so why should you care? Angels have no LPs, so their agendas tend to be far more transparent.

5) Angels aren’t compensated in ratios.
Angels get 100 percent of the profit they generate with their investment in your company. A VC only gets a fraction of the “carry” generated on your deal. This is one reason a VC might be motivated to urge you to sell bigger; they need the numerator in the exit math ratio to be bigger, or the denominator to be smaller, to maximize their piece of your deal. With an IRR compensation method, VCs get paid even more if you sell faster. But the thing to remember is that a VC is negotiating for the interests of others, not just himself. With angels, “it’s a merit-based discussion, or at least much more so, because the angel is actually getting the entire return,” Rafer says.

15 Responses to “F|R: 5 Reasons to Go All Angel à la Lookery”

  1. It’s far rarer than it needs to be. Too many entrepreneurs are ignorant of their options and willing to be herded like sheep by VCs and attorneys that just say, “It’s standard.” It’s the standard bad deal, but that counts for nothing when it’s a good startup.

  2. Scott,

    My comments on the need for a 1X liquidation preference is intended as general advice. In your particular case, we’re talking about a friendly deal where the entrepreneur is a known quantity; I can understand why the investors would agree to the terms.

    I think that co-sale + liquidation preference that only applies below a certain cash-on-cash return is a good approach to take, but is more entrepreneur friendly, and is thus (sadly) rare.

  3. The comments on the crib sheet post, are tied in:

    When entrepreneurs want a ton of cash to really go for it, the terms are fine. I just think they are overused terribly at the early stage with startup management who don’t really understand what they are buying into.

    @Chris Yeh
    The Preferred need protection but they don’t need control as a starting point of the negotiation. A 1X liquidity preference isn’t at all necessary. There are a hundred ways to solve that problem. Unlike @Saul Lieberman I think a co-sale right is much fairer to all parties than a liq pref.

    The mechanism that I like best is a co-sale right plus an _expiring_ liq pref tied to a drag along, i.e. below a certain multiple of cash-on-cash return, the Preferred has a bunch of rights and a bottom line payout. Above that multiple, everyone gets paid solely proportional to share ownership and the Common rules the roost change of control decisions.

    The reason to have a Preferred is to give out Common Stock options to new employees at a lower price than the investors paid.

  4. We are going to see this more and more. Why? Entrepreneurs are increasingly unhappy with the VC model and experience. Given that its cheaper to start and run a company these days, entrepreneurs have choices. They can postpone raising big VC$. If and when they do it, hopefully they can do so on better terms.

  5. I was always curious about this type of business model. I have friends who’ve talked about this, and even contacted a few people looking for startup “Angels” with mixes success. It seems like Lookery has a good handle on how to set things up.

    Maybe I should start up a company like Don’t Eat Dogs inc. We could start a website to convince people not to eat dogs, and we can point to our incredible success in America as a selling point. If someone points out that eating dogs has never been popular here, I’d point out that in that market it would be foolish to invest in something that is dog-eating based. And that’s why we started the company.

    They would look at me funny and I’d just smile, but I’m so damn charming, I’m pretty sure I could pull it off.